cnk-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

Commission File Number: 001-33401

CINEMARK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5490327

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3900 Dallas Parkway

 

 

Suite 500

 

 

Plano, Texas

 

75093

(Address of principal executive offices)

 

(Zip Code)

Registrant's telephone number, including area code:  (972) 665-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No 

As of October 31, 2017, 116,466,904 shares of common stock were issued and outstanding.  

 

 

 

 


 

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.     FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

34

 

 

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

35

 

 

 

 

 

 

Item 1A.

Risk Factors

 

35

 

 

 

 

 

 

Item 6.

Exhibits

 

36

 

 

 

 

 

SIGNATURES

 

37

 

2


 

Cautionary Statement Regarding Forward-Looking Statements

Certain matters within this Quarterly Report on Form 10Q include “forward–looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The “forward-looking statements” may include our current expectations, assumptions, estimates and projections about our business and our industry. They may include statements relating to future revenues, expenses and profitability, the future development and expected growth of our business, projected capital expenditures, attendance at movies generally or in any of the markets in which we operate, the number or diversity of popular movies released and our ability to successfully license and exhibit popular films, national and international growth in our industry, competition from other exhibitors and alternative forms of entertainment and determinations in lawsuits in which we are defendants.  Forward-looking statements can be identified by the use of words such as “may,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.  For a description of the risk factors, please review the “Risk Factors” section or other sections in the Company’s Annual Report on Form 10-K filed February 23, 2017 and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. All forward-looking statements are expressly qualified in their entirety by such risk factors. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

3


 

PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data, unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

469,446

 

 

$

561,235

 

Inventories

 

 

16,844

 

 

 

16,961

 

Accounts receivable

 

 

82,650

 

 

 

74,993

 

Current income tax receivable

 

 

4,381

 

 

 

7,367

 

Prepaid expenses and other

 

 

17,010

 

 

 

15,761

 

Total current assets

 

 

590,331

 

 

 

676,317

 

 

 

 

 

 

 

 

 

 

Theatre properties and equipment

 

 

3,268,653

 

 

 

3,059,754

 

Less: accumulated depreciation and amortization

 

 

1,477,047

 

 

 

1,355,218

 

Theatre properties and equipment, net

 

 

1,791,606

 

 

 

1,704,536

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,294,342

 

 

 

1,262,963

 

Intangible assets - net

 

 

335,657

 

 

 

334,899

 

Investment in NCM

 

 

204,347

 

 

 

189,995

 

Investments in and advances to affiliates

 

 

112,878

 

 

 

98,317

 

Long-term deferred tax asset

 

 

2,098

 

 

 

2,051

 

Deferred charges and other assets - net

 

 

40,391

 

 

 

37,555

 

Total other assets

 

 

1,989,713

 

 

 

1,925,780

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,371,650

 

 

$

4,306,633

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,099

 

 

$

5,671

 

Current portion of capital lease obligations

 

 

24,836

 

 

 

21,139

 

Current income tax payable

 

 

7,893

 

 

 

5,071

 

Current liability for uncertain tax positions

 

 

11,714

 

 

 

10,085

 

Accounts payable and accrued expenses

 

 

341,132

 

 

 

401,259

 

Total current liabilities

 

 

392,674

 

 

 

443,225

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,781,952

 

 

 

1,782,441

 

Capital lease obligations, less current portion

 

 

252,047

 

 

 

234,281

 

Long-term deferred tax liability

 

 

144,740

 

 

 

135,014

 

Long-term liability for uncertain tax positions

 

 

7,801

 

 

 

8,105

 

Deferred lease expenses

 

 

41,291

 

 

 

42,378

 

Deferred revenue - NCM

 

 

354,419

 

 

 

343,928

 

Other long-term liabilities

 

 

44,906

 

 

 

44,301

 

Total long-term liabilities

 

 

2,627,156

 

 

 

2,590,448

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Cinemark Holdings, Inc.'s stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value: 300,000,000 shares

   authorized, 120,992,302 shares issued and 116,467,227 shares outstanding

   at September 30, 2017 and 120,657,254 shares issued and 116,210,252 shares

   outstanding at December 31, 2016

 

 

121

 

 

 

121

 

Additional paid-in-capital

 

 

1,137,897

 

 

 

1,128,442

 

Treasury stock, 4,525,075 and 4,447,002 shares, at cost, at September 30, 2017

   and December 31, 2016, respectively

 

 

(76,354

)

 

 

(73,411

)

Retained earnings

 

 

521,058

 

 

 

453,679

 

Accumulated other comprehensive loss

 

 

(242,894

)

 

 

(247,013

)

Total Cinemark Holdings, Inc.'s stockholders' equity

 

 

1,339,828

 

 

 

1,261,818

 

Noncontrolling interests

 

 

11,992

 

 

 

11,142

 

Total equity

 

 

1,351,820

 

 

 

1,272,960

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,371,650

 

 

$

4,306,633

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


 

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data, unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions

 

$

425,128

 

 

$

472,842

 

 

$

1,351,477

 

 

$

1,364,737

 

Concession

 

 

247,027

 

 

 

261,391

 

 

 

777,573

 

 

 

752,798

 

Other

 

 

38,593

 

 

 

34,341

 

 

 

112,503

 

 

 

100,312

 

Total revenues

 

 

710,748

 

 

 

768,574

 

 

 

2,241,553

 

 

 

2,217,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film rentals and advertising

 

 

226,229

 

 

 

249,766

 

 

 

725,603

 

 

 

733,101

 

Concession supplies

 

 

40,178

 

 

 

41,888

 

 

 

124,117

 

 

 

116,999

 

Salaries and wages

 

 

87,305

 

 

 

84,460

 

 

 

261,318

 

 

 

243,833

 

Facility lease expense

 

 

81,919

 

 

 

82,848

 

 

 

248,569

 

 

 

241,904

 

Utilities and other

 

 

92,341

 

 

 

94,999

 

 

 

271,751

 

 

 

265,506

 

General and administrative expenses

 

 

36,947

 

 

 

35,290

 

 

 

112,997

 

 

 

109,143

 

Depreciation and amortization

 

 

58,052

 

 

 

54,187

 

 

 

174,545

 

 

 

155,874

 

Impairment of long-lived assets

 

 

5,026

 

 

 

406

 

 

 

9,600

 

 

 

2,323

 

Loss on sale of assets and other

 

 

8,576

 

 

 

6,940

 

 

 

9,464

 

 

 

10,985

 

Total cost of operations

 

 

636,573

 

 

 

650,784

 

 

 

1,937,964

 

 

 

1,879,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

74,175

 

 

 

117,790

 

 

 

303,589

 

 

 

338,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(26,317

)

 

 

(26,659

)

 

 

(79,208

)

 

 

(81,980

)

Loss on debt amendments and refinancing

 

 

 

 

 

 

 

 

(246

)

 

 

(13,284

)

Interest income

 

 

1,682

 

 

 

1,665

 

 

 

4,395

 

 

 

5,030

 

Foreign currency exchange gain

 

 

584

 

 

 

485

 

 

 

2,018

 

 

 

2,883

 

Distributions from NCM

 

 

2,144

 

 

 

1,381

 

 

 

11,704

 

 

 

10,117

 

Equity in income of affiliates

 

 

10,902

 

 

 

12,390

 

 

 

26,767

 

 

 

24,597

 

Total other expense

 

 

(11,005

)

 

 

(10,738

)

 

 

(34,570

)

 

 

(52,637

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

63,170

 

 

 

107,052

 

 

 

269,019

 

 

 

285,542

 

Income taxes

 

 

24,630

 

 

 

40,926

 

 

 

98,475

 

 

 

106,002

 

Net income

 

$

38,540

 

 

$

66,126

 

 

$

170,544

 

 

$

179,540

 

Less:  Net income attributable to noncontrolling interests

 

 

401

 

 

 

471

 

 

 

1,438

 

 

 

1,454

 

Net income attributable to Cinemark Holdings, Inc.

 

$

38,139

 

 

$

65,655

 

 

$

169,106

 

 

$

178,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

115,823

 

 

 

115,601

 

 

 

115,746

 

 

 

115,475

 

Diluted

 

 

116,104

 

 

 

115,793

 

 

 

116,063

 

 

 

115,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Cinemark Holdings, Inc.'s

   common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

 

$

0.56

 

 

$

1.45

 

 

$

1.53

 

Diluted

 

$

0.33

 

 

$

0.56

 

 

$

1.45

 

 

$

1.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.29

 

 

$

0.27

 

 

$

0.87

 

 

$

0.81

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


 

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

38,540

 

 

$

66,126

 

 

$

170,544

 

 

$

179,540

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain due to fair value adjustments on interest rate

   swap agreements, net of settlements, net of taxes of $0, $0,

   $0 and $138

 

 

 

 

 

 

 

 

 

 

 

234

 

Other comprehensive income (loss) in equity method

   investments

 

 

(11

)

 

 

(7

)

 

 

92

 

 

 

(183

)

Foreign currency translation adjustments

 

 

9,085

 

 

 

(3,669

)

 

 

5,578

 

 

 

34,998

 

Total other comprehensive income (loss), net of tax

 

 

9,074

 

 

 

(3,676

)

 

 

5,670

 

 

 

35,049

 

Total comprehensive income, net of tax

 

 

47,614

 

 

 

62,450

 

 

 

176,214

 

 

 

214,589

 

Comprehensive income attributable to noncontrolling interests

 

 

(401

)

 

 

(475

)

 

 

(1,438

)

 

 

(1,478

)

Comprehensive income attributable to Cinemark

   Holdings, Inc.

 

$

47,213

 

 

$

61,975

 

 

$

174,776

 

 

$

213,111

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


 

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

170,544

 

 

$

179,540

 

Adjustments to reconcile net income to cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

173,378

 

 

 

154,308

 

Amortization of intangible and other assets and

   favorable/unfavorable leases

 

 

1,167

 

 

 

1,566

 

Amortization of long-term prepaid rents

 

 

1,540

 

 

 

1,357

 

Amortization of debt issue costs

 

 

4,619

 

 

 

4,068

 

Amortization of deferred revenues, deferred lease incentives

   and other

 

 

(12,037

)

 

 

(13,017

)

Impairment of long-lived assets

 

 

9,600

 

 

 

2,323

 

Share based awards compensation expense

 

 

9,487

 

 

 

10,247

 

Loss on sale of assets and other

 

 

9,464

 

 

 

10,985

 

Write-off of unamortized debt issue costs associated with early

   retirement of debt

 

 

 

 

 

2,369

 

Deferred lease expenses

 

 

(1,019

)

 

 

(809

)

Equity in income of affiliates

 

 

(26,767

)

 

 

(24,597

)

Deferred income tax expenses

 

 

9,541

 

 

 

16,382

 

Distributions from equity investees

 

 

17,321

 

 

 

9,660

 

Changes in assets and liabilities and other

 

 

(55,433

)

 

 

(76,102

)

Net cash provided by operating activities

 

 

311,405

 

 

 

278,280

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Additions to theatre properties and equipment and other

 

 

(262,730

)

 

 

(230,346

)

Acquisitions of theatres in the U.S. and international markets

 

 

(41,000

)

 

 

(15,300

)

Proceeds from sale of theatre properties and equipment and other

 

 

14,816

 

 

 

3,398

 

Proceeds from sale of marketable securities

 

 

 

 

 

13,451

 

Investment in joint ventures and other

 

 

(1,178

)

 

 

(1,703

)

Net cash used for investing activities

 

 

(290,092

)

 

 

(230,500

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Dividends paid to stockholders

 

 

(101,304

)

 

 

(94,117

)

Payroll taxes paid as a result of restricted stock withholdings

 

 

(2,943

)

 

 

(6,828

)

Proceeds from issuance of Senior Notes, net of discount

 

 

 

 

 

222,750

 

Retirement of Senior Subordinated Notes

 

 

 

 

 

(200,000

)

Repayments of long-term debt

 

 

(2,855

)

 

 

(15,217

)

Payment of debt issue costs

 

 

(817

)

 

 

(4,504

)

Payments on capital leases

 

 

(15,814

)

 

 

(14,655

)

Proceeds from financing lease

 

 

10,200

 

 

 

 

Other

 

 

(620

)

 

 

1,282

 

Net cash used for financing activities

 

 

(114,153

)

 

 

(111,289

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,051

 

 

 

2,081

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(91,789

)

 

 

(61,428

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

561,235

 

 

 

588,539

 

End of period

 

$

469,446

 

 

$

527,111

 

 

 

 

 

 

 

 

 

 

Supplemental information (see Note 13)

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

7


 

CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

 

1.

The Company and Basis of Presentation

Cinemark Holdings, Inc. and subsidiaries (the “Company”) operates in the motion picture exhibition industry, with theatres in the United States (“U.S.”), Brazil, Argentina, Chile, Colombia, Peru, Ecuador, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Guatemala, Bolivia, Curacao and Paraguay.

The accompanying condensed consolidated balance sheet as of December 31, 2016, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. Majority-owned subsidiaries that the Company has control of are consolidated while those affiliates of which the Company owns between 20% and 50% and does not control are accounted for under the equity method. Those affiliates of which the Company owns less than 20% are generally accounted for under the cost method, unless the Company is deemed to have the ability to exercise significant influence over the affiliate, in which case the Company would account for its investment under the equity method. The results of these subsidiaries and affiliates are included in the condensed consolidated financial statements effective with their formation or from their dates of acquisition. Intercompany balances and transactions are eliminated in consolidation.  

These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and the notes thereto for the year ended December 31, 2016, included in the Annual Report on Form 10-K filed February 23, 2017 by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be achieved for the full year.

 

2.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and create a common revenue standard for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).  The following subsequent Accounting Standards Updates either clarified or revised guidance set forth in ASU 2014-09:

 

In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, (“ASU 2015-14”).  ASU 2015-14 deferred the effective date of ASU 2014-09.  The guidance in ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.

 

In March 2016, the FASB issued Accounting Standards Update 2016-08, Revenue from Contracts with Customers (Topic 606):  Principal versus Agent Considerations (Reporting Revenues Gross versus Net), (“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of revenue recognition guidance for principal versus agent considerations.

 

In April 2016, the FASB issued Accounting Standards Update 2016-10, Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing, (“ASU 2016-10”). The purpose of ASU 2016-10 is to clarify certain aspects of identifying performance obligations and licensing implementation guidance.

 

In May 2016, the FASB issued Accounting Standards Update 2016-12, Revenue from Contracts with Customers (Topic 606):  Narrow-Scope Improvements and Practical Expedients, (“ASU 2016-12”). The purpose of ASU 2016-12 is to address certain narrow aspects of Accounting Standards Codification (“ASC”) Topic 606 including assessing collectability, presentation of sales taxes, noncash considerations, contract modifications and completed contracts at transition.

 

In December 2016, the FASB issued Accounting Standards Update 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, (“ASU 2016-20”). The purpose of ASU 2016-20 is to amend certain narrow aspects of the guidance issued in ASU 2014-09 related to the disclosure of performance obligations, as well as

8


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

 

other amendments related to loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.

The amendments in these accounting standards updates may be applied either using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective or retrospectively to each period presented. Early adoption is permitted.

The Company will adopt the amendments within these accounting standards updates in the first quarter of 2018 using the modified retrospective transition method. The Company is continuing to evaluate the impact of these accounting standards updates on its condensed consolidated financial statements, specifically with respect to the Company’s Exhibitor Services Agreement (“ESA”) with NCM, loyalty program accounting, breakage income for stored value cards as well as other ancillary and contractual revenues.  The Company believes its ESA with NCM includes a significant financing component and, as a result, other revenues will increase with a similar offsetting increase in interest expense each year until the ESA term expires.  In addition, the amortization method used to amortize the deferred revenue associated with the ESA will change to straight-line under the new accounting standards due to the nature of the Company’s performance obligation under the ESA. The change in amortization method will result in a cumulative effect adjustment upon adoption, the value of which the Company is currently evaluating.  

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), (“ASU 2016-02”). The purpose of ASU 2016-02 is to provide financial statement users a better understanding of the amount, timing, and uncertainty of cash flows arising from leases. The adoption of ASU 2016-02 will result in the recognition of a right-of-use asset and a lease liability for most operating leases.  New disclosure requirements include qualitative and quantitative information about the amounts recorded in the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. ASU 2016-02 requires a modified retrospective transition by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective with the option to elect certain practical expedients. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-02 on its condensed consolidated financial statements.  The most significant impact of the amendments in ASU 2016-02 will be the recognition of new right-of-use assets and lease liabilities for assets currently subject to operating leases.  The Company will adopt the amendments in ASU 2016-02 in the first quarter of 2019.  

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”). The purpose of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of such activity on the statement of cash flows.  ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within that year.  Prospective, retrospective, or modified retrospective application may be used dependent on the specific requirements of the amendments within ASU 2016-09. Effective January 1, 2017, the Company adopted ASU 2016-09 on a prospective basis (see Note 3).  As such, prior periods have not been adjusted.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments – a consensus of the FASB Emerging Issues Task Force, (“ASU 2016-15”). The purpose of ASU 2016-15 is to reduce the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year.  A retrospective transition method should be used in the application of the amendments within ASU 2016-15.  Early adoption is permitted. The Company does not expect ASU 2016-15 to have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendments should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company adopted the amendments in ASU 2017-04 during the second quarter of 2017 in order to reduce the complexity of performing its goodwill impairment tests.  As discussed in Note 9, these tests are generally performed in the fourth quarter of each year.  The Company does not expect ASU 2017-04 to have a material impact on its condensed consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation – Stock Compensation (Topic 718):  Scope Modification Accounting, (“ASU 2017-09”). The amendments in ASU 2017-09 provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting as described in ASC Topic

9


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

718.  The amendments should be applied on a prospective basis. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted.  The Company does not expect ASU 2017-09 to have a material impact on its condensed consolidated financial statements.  

In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815):  Targeted Improvements to Accounting for Hedging Activities, (“ASU 2017-12”). The amendments in ASU 2017-12 improve the financial reporting of hedging relationships to better reflect the economic results of an entity’s risk management activities in its financial statements.  Additionally, the amendments in ASU 2017-12 simplify certain steps of applying hedge accounting guidance.  ASU 2017-04 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted.  The Company does not expect ASU 2017-12 to have a material impact on its condensed consolidated financial statements.

3.

Earnings Per Share

The Company considers its unvested restricted stock awards, which contain non-forfeitable rights to dividends, participating securities, and includes such participating securities in its computation of earnings per share pursuant to the two-class method. Basic earnings per share for the two classes of stock (common stock and unvested restricted stock) is calculated by dividing net income by the weighted average number of shares of common stock and unvested restricted stock outstanding during the reporting period. Diluted earnings per share is calculated using the weighted average number of shares of common stock plus the potentially dilutive effect of common equivalent shares outstanding determined under both the two class method and the treasury stock method.

Effective January 1, 2017, the Company adopted ASU 2016-09 on a prospective basis.  In accordance with the amendments in ASU 2016-09, the Company’s diluted earnings per share calculation for the three and nine months ended September 30, 2017 excludes the estimated income tax benefits and deficiencies in the application of the treasury stock method.  Excess income tax benefits or deficiencies related to share based awards are recognized as discrete items in the income statement during the period in which they occur. See Note 8 for a discussion of share based awards and related income tax benefits recognized during the nine months ended September 30, 2017 and 2016.

The following table presents computations of basic and diluted earnings per share under the two-class method:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cinemark Holdings, Inc.

 

$

38,139

 

 

$

65,655

 

 

$

169,106

 

 

$

178,086

 

Earnings allocated to participating share-based awards (1)

 

 

(209

)

 

 

(336

)

 

 

(842

)

 

 

(805

)

Net income attributable to common stockholders

 

$

37,930

 

 

$

65,319

 

 

$

168,264

 

 

$

177,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator (shares in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common stock outstanding

 

 

115,823

 

 

 

115,601

 

 

 

115,746

 

 

 

115,475

 

Common equivalent shares for restricted stock units

 

 

281

 

 

 

192

 

 

 

317

 

 

 

231

 

Diluted

 

 

116,104

 

 

 

115,793

 

 

 

116,063

 

 

 

115,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common

   stockholders

 

$

0.33

 

 

$

0.56

 

 

$

1.45

 

 

$

1.53

 

Diluted earnings per share attributable to common

   stockholders

 

$

0.33

 

 

$

0.56

 

 

$

1.45

 

 

$

1.53

 

 

(1)

For the three months ended September 30, 2017 and 2016, a weighted average of approximately 643 and 596 shares of unvested restricted stock, respectively, were considered participating securities. For the nine months ended September 30, 2017 and 2016, a weighted average of approximately 581 and 526 shares of unvested restricted stock, respectively, were considered participating securities.

10


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

4.

Long Term Debt Activity

Senior Secured Credit Facility

On June 16, 2017, Cinemark USA, Inc., our wholly-owned subsidiary, amended its senior secured credit facility to reduce the rate at which the term loan bears interest by 0.25% and to modify certain covenant definitions within the agreement. The Company incurred debt issue costs of approximately $521 in connection with the amendment, which are reflected as a reduction of long term debt on the condensed consolidated balance sheet as of September 30, 2017.  In addition, the Company incurred approximately $246 in legal fees that are reflected as loss on debt amendments and refinancing on the condensed consolidated statements of income for the nine months ended September 30, 2017.  

Fair Value of Long-Term Debt

The Company estimates the fair value of its long-term debt using the market approach, which utilizes quoted market prices that fall under Level 2 of the U.S. GAAP fair value hierarchy as defined by ASC Topic 820. The carrying value of the Company’s long-term debt was $1,820,112 and $1,822,966 as of September 30, 2017 and December 31, 2016, respectively, excluding unamortized debt discounts and debt issue costs. The fair value of the Company’s long-term debt was $1,840,641 and $1,850,212 as of September 30, 2017 and December 31, 2016, respectively.

5.

Equity

Below is a summary of changes in stockholders’ equity attributable to Cinemark Holdings, Inc., noncontrolling interests and total equity for the nine months ended September 30, 2017 and 2016:

 

 

 

Cinemark

 

 

 

 

 

 

 

 

 

 

 

Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at January 1, 2017

 

$

1,261,818

 

 

$

11,142

 

 

$

1,272,960

 

Share based awards compensation expense

 

 

9,487

 

 

 

 

 

 

9,487

 

Stock withholdings related to share based awards that

   vested during the nine months ended September 30, 2017

 

 

(2,943

)

 

 

 

 

 

(2,943

)

Tax expense related to share based awards vesting

 

 

(32

)

 

 

 

 

(32

)

Dividends paid to stockholders (1)

 

 

(101,304

)

 

 

 

 

 

(101,304

)

Dividends accrued on unvested restricted stock unit

   awards (1)

 

 

(423

)

 

 

 

 

 

(423

)

Dividends paid to noncontrolling interests

 

 

 

 

 

(588

)

 

 

(588

)

Net income

 

 

169,106

 

 

 

1,438

 

 

 

170,544

 

Other comprehensive income in equity method investees

 

 

92

 

 

 

 

 

 

92

 

Foreign currency translation adjustments (see Note 12)

 

 

4,027

 

 

 

 

 

 

4,027

 

Balance at September 30, 2017

 

$

1,339,828

 

 

$

11,992

 

 

$

1,351,820

 

 

 

(1)

Below is a summary of dividends paid to stockholders and accrued on unvested restricted stock unit awards during the nine months ended September 30, 2017:  

 

 

 

 

 

 

Amount per Share

 

 

 

 

Declaration Date

 

Record Date

 

Payable Date

 

of Common Stock

 

 

Total

 

2/23/2017

 

3/8/2017

 

3/20/2017

 

$

0.29

 

 

$

33,912

 

5/25/2017

 

6/8/2017

 

6/22/2017

 

 

0.29

 

 

 

33,904

 

8/10/2017

 

8/31/2017

 

9/13/2017

 

 

0.29

 

 

 

33,911

 

 

 

 

 

Total

 

$

0.87

 

 

$

101,727

 

11


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

 

 

 

Cinemark

 

 

 

 

 

 

 

 

 

 

 

Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at January 1, 2016

 

$

1,099,708

 

 

$

11,105

 

 

$

1,110,813

 

Share based awards compensation expense

 

 

10,247

 

 

 

 

 

10,247

 

Stock withholdings related to share based awards that

   vested during the nine months ended September 30, 2016

 

 

(6,828

)

 

 

 

 

(6,828

)

Issuance of common stock related to restricted stock units

   that vested during the nine months ended September 30, 2016

 

 

1

 

 

 

 

 

1

 

Tax benefit related to share based awards vesting

 

 

1,797

 

 

 

 

 

1,797

 

Dividends paid to stockholders (2)

 

 

(94,117

)

 

 

 

 

(94,117

)

Dividends accrued on unvested restricted stock unit

   awards (2)

 

 

(360

)

 

 

 

 

(360

)

Dividends paid to noncontrolling interests

 

 

 

 

(515

)

 

 

(515

)

Net income

 

 

178,086

 

 

 

1,454

 

 

 

179,540

 

Fair value adjustments on interest rate swap agreements

   designated as hedges, net of settlements, net of

   taxes of  $138

 

 

234

 

 

 

 

 

234

 

Gain realized on available-for-sale securities, net of

   taxes of $1,180

 

 

(2,011

)

 

 

 

 

(2,011

)

Other comprehensive loss in equity method investees

 

 

(183

)

 

 

 

 

(183

)

Foreign currency translation adjustments

 

 

34,974

 

 

 

24

 

 

 

34,998

 

Balance at September 30, 2016

 

$

1,221,548

 

 

$

12,068

 

 

$

1,233,616

 

 

 

(2)

Below is a summary of dividends paid to stockholders and accrued on unvested restricted stock unit awards during the nine months ended September 30, 2016:  

 

 

 

 

 

 

Amount per Share

 

 

 

 

Declaration Date

 

Record Date

 

Payable Date

 

of Common Stock

 

 

Total

 

2/24/2016

 

3/7/2016

 

3/18/2016

 

$

0.27

 

 

$

31,367

 

5/26/2016

 

6/8/2016

 

6/22/2016

 

 

0.27

 

 

 

31,373

 

8/18/2016

 

8/31/2016

 

9/13/2016

 

 

0.27

 

 

 

31,737

 

 

 

 

 

Total

 

$

0.81

 

 

$

94,477

 

 

6.

Investment in National CineMedia

The Company has an investment in National CineMedia, LLC (“NCM”).  NCM operates a digital in-theatre network in the U.S. for providing cinema advertising. Upon joining NCM, the Company entered into an Exhibitor Services Agreement with NCM (“ESA”), pursuant to which NCM provides advertising and promotions to our theatres. As described further in Note 5 to the Company’s financial statements as included in its 2016 Annual Report on Form 10-K, on February 13, 2007, National CineMedia, Inc. (“NCM, Inc.”), an entity that serves as the sole manager of NCM, completed an initial public offering (“IPO”) of its common stock. In connection with the NCM, Inc. initial public offering, the Company amended its operating agreement and the ESA. Following the NCM, Inc. IPO, the Company does not recognize undistributed equity in the earnings on its original NCM membership units (referred to herein as the Company’s Tranche 1 Investment) until NCM’s future net earnings, less distributions received, surpass the amount of the excess distribution. The Company recognizes equity in earnings on its Tranche 1 Investment only to the extent it receives cash distributions from NCM. The Company recognizes cash distributions it receives from NCM on its Tranche 1 Investment as a component of earnings as Distributions from NCM.  The Company believes that the accounting model provided by ASC Topic 323-10-35-22 for recognition of equity investee losses in excess of an investor’s basis is analogous to the accounting for equity income subsequent to recognizing an excess distribution.

12


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Below is a summary of activity with NCM included in the Company’s condensed consolidated financial statements:

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

Deferred

 

 

from

 

 

Equity in

 

 

Other

 

 

Cash

 

 

 

in NCM

 

 

Revenue

 

 

NCM

 

 

Income

 

 

Revenue

 

 

Received

 

Balance as of January 1, 2017

 

$

189,995

 

 

$

(343,928

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of common units due to annual common

   unit adjustment

 

 

18,363

 

 

 

(18,363

)

 

$

 

 

$

 

 

$

 

 

$

 

Revenues earned under ESA (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,446

)

 

 

8,446

 

Receipt of excess cash distributions

 

 

(10,020

)

 

 

 

 

 

(9,630

)

 

 

 

 

 

 

 

 

19,650

 

Receipt under tax receivable agreement

 

 

(2,089

)

 

 

 

 

 

(2,074

)

 

 

 

 

 

 

 

 

4,163

 

Equity in earnings

 

 

8,098

 

 

 

 

 

 

 

 

 

(8,098

)

 

 

 

 

 

 

Amortization of deferred revenue

 

 

 

 

 

7,872

 

 

 

 

 

 

 

 

 

(7,872

)

 

 

 

Balance as of and for the nine months ended September 30, 2017

 

$

204,347

 

 

$

(354,419

)

 

$

(11,704

)

 

$

(8,098

)

 

$

(16,318

)

 

$

32,259

 

 

(1)

Amount includes the per patron and per digital screen theatre access fees due to the Company, net of amounts paid to NCM for on-screen advertising time provided to the Company’s beverage concessionaire of approximately $8,382.

During the three months ended September 30, 2017 and 2016, the Company recorded equity in earnings of approximately $5,032 and $5,815, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded equity in earnings of approximately $8,098 and $7,660, respectively.

The Company made payments to NCM of approximately $75 and $41 during the nine months ended September 30, 2017 and 2016, respectively, related to installation of certain equipment used for digital advertising, which is included in theatre properties and equipment on the condensed consolidated balance sheets.  

Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCM, Inc. and the Company, AMC Entertainment, Inc. (“AMC”) and Regal Entertainment Group (“Regal”) (collectively, “Founding Members”), annual adjustments to the common membership units are made primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated by each Founding Member. As further discussed in Note 5 to the Company’s financial statements as included in its 2016 Annual Report on Form 10-K, the common units received are recorded at fair value as an increase in the Company’s investment in NCM with an offset to deferred revenue. The deferred revenue is amortized over the remaining term of the ESA. During March 2017, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, on March 30, 2017, the Company received an additional 1,487,218 common units of NCM, each of which is convertible into one share of NCM, Inc. common stock. The Company recorded the additional common units received at estimated fair value with a corresponding adjustment to deferred revenue of approximately $18,363. The fair value of the common units received was estimated based on the market price of NCM, Inc. stock at the time the common units were determined, adjusted for volatility associated with the estimated time period it would take to convert the common units and register the respective shares.  The deferred revenue will be recognized over the remaining term of the ESA, which is approximately 19 years.

As of September 30, 2017, the Company owned a total of 27,871,862 common units of NCM, representing an ownership interest of approximately 18%. The estimated fair value of the Company’s investment in NCM was approximately $194,546 based on NCM, Inc.’s stock price as of September 30, 2017 of $6.98 per share (Level 1 input as defined in FASB ASC Topic 820), which was less than the Company’s carrying value of $204,347.  The Company does not believe that the decline in NCM, Inc.’s stock price is other than temporary and therefore, no impairment of the Company’s investment in NCM was recorded during the nine months ended September 30, 2017.  The market value of NCM, Inc.’s stock price may change due to the performance of the business, industry trends, general and economic conditions and other factors.  

13


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Below is summary financial information for NCM for the three and six months ended June 29, 2017 (the financial information for the three and nine months ended September 28, 2017 is not yet available) and the three and nine months ended September 29, 2016:

 

 

 

Three Months

 

 

Six Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Ended

June 29, 2017

 

 

June 29, 2017

 

 

September 29, 2016

 

 

September 29, 2016

 

Gross revenues

 

$

97,042

 

 

$

168,962

 

 

$

113,476

 

 

$

305,101

 

Operating income

 

$

28,430

 

 

$

33,500

 

 

$

48,481

 

 

$

100,911

 

Net income

 

$

15,377

 

 

$

7,465

 

 

$

23,909

 

 

$

49,619

 

 

 

7.

Other Investments

Below is a summary of activity for each of the Company’s other investments for the nine months ended September 30, 2017:

 

 

 

DCIP

 

 

AC JV,

LLC

 

 

DCDC

 

 

Other

 

 

Total

 

Balance at January 1, 2017

 

$

87,819

 

 

$

5,980

 

 

$

2,750

 

 

$

1,768

 

 

$

98,317

 

Cash contributions

 

 

1,109

 

 

 

 

 

 

 

 

 

68

 

 

 

1,177

 

Cash distributions

 

 

(5,212

)

 

 

 

 

 

 

 

 

 

 

 

(5,212

)

Equity in income

 

 

16,820

 

 

 

996

 

 

 

853

 

 

 

 

 

 

18,669

 

Equity in other comprehensive income

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

92

 

Other

 

 

 

 

 

 

 

 

 

 

 

(165

)

 

 

(165

)

Balance at September 30, 2017

 

$

100,628

 

 

$

6,976

 

 

$

3,603

 

 

$

1,671

 

 

$

112,878

 

 

Digital Cinema Implementation Partners LLC (“DCIP”)

On February 12, 2007, the Company, AMC and Regal entered into a joint venture known as DCIP to facilitate the implementation of digital cinema in the Company’s theatres and to establish agreements with major motion picture studios for the financing of digital cinema. As of September 30, 2017, the Company had a 33% voting interest in DCIP and a 24.3% economic interest in DCIP. The Company accounts for its investment in DCIP and its subsidiaries under the equity method of accounting.

Below is summary financial information for DCIP for the three and nine months ended September 30, 2017 and 2016.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Gross revenues

 

$

39,961

 

 

$

48,274

 

 

$

132,535

 

 

$

133,675

 

Operating income

 

$

22,702

 

 

$

31,180

 

 

$

80,574

 

 

$

82,369

 

Net income

 

$

19,701

 

 

$

26,949

 

 

$

69,458

 

 

$

67,728

 

 

As of September 30, 2017, the Company had 3,796 digital projection systems being leased under the master equipment lease agreement with Kasima LLC, which is an indirect subsidiary of DCIP and a related party to the Company. The Company had the following transactions, reflected in utilities and other costs on the condensed consolidated income statement, with DCIP during the three and nine months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Equipment lease payments

 

$

1,452

 

 

$

1,333

 

 

$

4,333

 

 

$

3,864

 

Warranty reimbursements from DCIP

 

$

(2,234

)

 

$

(1,608

)

 

$

(6,141

)

 

$

(4,367

)

Management service fees

 

$

207

 

 

$

207

 

 

$

619

 

 

$

619

 

 

14


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

AC JV, LLC

During December 2013, the Company, Regal, AMC (the “AC Founding Members”) and NCM entered into a series of agreements that resulted in the formation of AC JV, LLC (“AC”), a joint venture that owns “Fathom Events” (consisting of Fathom Events and Fathom Consumer Events) formerly operated by NCM.  The Fathom Events business focuses on the marketing and distribution of live and pre-recorded entertainment programming to various theatre operators to provide additional programs that augment their feature film schedule. The Fathom Consumer Events business includes live and pre-recorded concerts featuring contemporary music, opera and symphony, DVD product releases and marketing events, theatrical premieres, Broadway plays, live sporting events and other special events. The Company paid event fees to AC of $9,448 and $7,808 for the nine months ended September 30, 2017 and 2016, respectively, which are included in film rentals and advertising costs on the condensed consolidated statements of income.

AC was formed by the AC Founding Members and NCM. NCM, under a contribution agreement, contributed the assets associated with its Fathom Events division to AC in exchange for 97% ownership of the Class A Units of AC. Under a separate contribution agreement, the Founding Members each contributed cash of approximately $268 to AC in exchange for 1% of the Class A Units of AC. Subsequently,  NCM and the Founding Members entered into a Membership Interest Purchase Agreement, under which NCM sold each of the Founding Members 31% of its Class A Units in AC, the aggregate value of which was determined to be $25,000, in exchange for a six-year promissory note.  Each of the Founding Members’ promissory notes were originally for $8,333, bear interest at 5% per annum and require annual principal and interest payments. The remaining outstanding balance of the note payable from the Company to NCM as of September 30, 2017 was $4,167.

Digital Cinema Distribution Coalition

Digital Cinema Distribution Coalition (“DCDC”) is a joint venture among the Company, Universal, Warner Bros., AMC and Regal.  DCDC operates a satellite distribution network that distributes all digital content to U.S. theatres via satellite. The Company has an approximate 14.6% ownership in DCDC. The Company paid approximately $637 and $707 to DCDC during the nine months ended September 30, 2017 and 2016, respectively, related to content delivery services provided by DCDC.  These fees are included in film rentals and advertising costs on the condensed consolidated statements of income.

8.

Treasury Stock and Share Based Awards

Treasury Stock — Treasury stock represents shares of common stock repurchased or withheld by the Company and not yet retired. The Company has applied the cost method in recording its treasury shares.  Below is a summary of the Company’s treasury stock activity for the nine months ended September 30, 2017:

 

 

 

Number of

 

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Shares

 

 

Cost

 

Balance at January 1, 2017

 

 

4,447,002

 

 

$

73,411

 

Restricted stock withholdings (1)

 

 

68,523

 

 

 

2,943

 

Restricted stock forfeitures

 

 

9,550

 

 

 

 

Balance at September 30, 2017

 

 

4,525,075

 

 

$

76,354

 

 

(1)

The Company withheld restricted shares as a result of the election by certain employees to satisfy their tax liabilities upon vesting in restricted stock and restricted stock units.  The Company determined the number of shares to be withheld based upon market values ranging from $33.36 to $44.44 per share.

As of September 30, 2017, the Company had no plans to retire any shares of treasury stock.

Restricted Stock – During the nine months ended September 30, 2017, the Company granted 237,933 shares of restricted stock to directors and employees. The fair value of the restricted stock granted was determined based on the market value of the Company’s common stock on the dates of grant, which ranged from $38.65 to $42.37 per share. The Company assumed forfeiture rates that ranged from 0% to 10% for the restricted stock awards. The restricted stock granted to directors vests over a one year service period. The restricted stock granted to employees vests over a four year service period. The recipients of restricted stock are entitled to receive non-forfeitable dividends and to vote their respective shares, however, the sale and transfer of the restricted shares is prohibited during the restriction period.

15


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Below is a summary of restricted stock activity for the nine months ended September 30, 2017:

 

 

 

Shares of

 

 

Weighted

Average

 

 

 

Restricted

 

 

Grant Date

 

 

 

Stock

 

 

Fair Value

 

Outstanding at January 1, 2017

 

 

606,618

 

 

$

33.51

 

Granted

 

 

237,933

 

 

$

41.94

 

Vested

 

 

(192,152

)

 

$

36.26

 

Forfeited

 

 

(9,550

)

 

$

33.00

 

Outstanding at September 30, 2017

 

 

642,849

 

 

$

35.82

 

Unvested restricted stock at September 30, 2017

 

 

642,849

 

 

$

35.82

 

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Compensation expense recognized during the period

 

$

6,298

 

 

$

6,551

 

Fair value of restricted shares that vested during the period

 

$

8,169

 

 

$

14,662

 

Income tax benefit recognized upon vesting of restricted stock     awards

 

$

2,665

 

 

$

5,555

 

 

As of September 30, 2017, the estimated remaining unrecognized compensation expense related to unvested restricted stock awards was $15,335 and the weighted average period over which this remaining compensation expense will be recognized is approximately two years.

Restricted Stock Units – During the nine months ended September 30, 2017, the Company granted restricted stock units representing 175,634 hypothetical shares of common stock to employees. The restricted stock units vest based on a combination of financial performance factors and continued service. The financial performance factors are based on an implied equity value concept that determines an internal rate of return (“IRR”) during the two fiscal year periods ending December 31, 2018 based on a formula utilizing a multiple of Adjusted EBITDA subject to certain specified adjustments as specified by the Compensation Committee prior to the grant date. The financial performance factors for the restricted stock units have a threshold, target and maximum level of payment opportunity and vest on a prorata basis according to the IRR achieved by the Company during the performance period. If the IRR for the two-year period is at least 7%, which is the threshold, one-third of the maximum restricted stock units vest. If the IRR for the two-year period is at least 9.5%, which is the target, two-thirds of the maximum restricted stock units vest. If the IRR for the two-year period is at least 13%, which is the maximum, 100% of the maximum restricted stock units vest. Grantees are eligible to receive a ratable portion of the common stock issuable if the IRR is within the targets previously noted. Further, as an example, if the Company achieves an IRR equal to 11%, the number of restricted stock units that shall vest will be greater than the target but less than the maximum number that would have vested had the Company achieved the highest IRR.  All restricted stock units granted during 2017 will vest subject to an additional two-year service requirement and will be paid in the form of common stock if the participant continues to provide services through February 2021, which is the fourth anniversary of the grant date. Restricted stock unit award participants are eligible to receive dividend equivalent payments from the grant date if, and at the time that, the restricted stock unit awards vest.  

Below is a table summarizing the potential number of shares that could vest under restricted stock unit awards granted during the nine months ended September 30, 2017 at each of the three target levels of financial performance (excluding forfeiture assumptions):

 

 

 

Number of

 

 

 

 

 

 

 

Shares

 

 

Value at

 

 

 

Vesting

 

 

Grant

 

at IRR of at least 7%

 

 

58,545

 

 

$

2,481

 

at IRR of at least 9.5%

 

 

117,089

 

 

$

4,961

 

at IRR of at least 13%

 

 

175,634

 

 

$

7,442

 

 

Due to the fact that the IRR for the two-year performance period could not be determined at the time of the 2017 grant, the Company estimated that the most likely outcome is the achievement of the target IRR level. The fair value of the restricted stock unit

16


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

awards was determined based on the closing price of the Company’s common stock on the date of grant, which was $42.37 per share. The Company assumed a forfeiture rate of 5% for the restricted stock unit awards. If during the service period, additional information becomes available to lead the Company to believe a different IRR level will be achieved for the two-year performance period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis over the remaining service period.

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Number of restricted stock unit awards that vested during

   the period

 

 

97,115

 

 

 

213,984

 

Fair value of restricted stock unit awards that vested during

   the period

 

$

4,155

 

 

$

7,260

 

Accumulated dividends paid upon vesting of restricted stock

   unit awards

 

$

313

 

 

$

662

 

Compensation expense recognized during the period

 

$

3,189

 

 

$

3,696

 

Income tax benefit recognized upon vesting of restricted stock

   unit awards

 

$

1,745

 

 

$

3,049

 

 

As of September 30, 2017, the estimated remaining unrecognized compensation expense related to the outstanding restricted stock unit awards was $8,314. The weighted average period over which this remaining compensation expense will be recognized is approximately two years. As of September 30, 2017, the Company had restricted stock units outstanding that represented a total of 628,189 hypothetical shares of common stock, net of actual cumulative forfeitures of 7,407 units, assuming the maximum IRR level is achieved for all grants outstanding.

9.

Goodwill and Other Intangible Assets

The Company’s goodwill was as follows:

 

 

 

U.S.

Operating

Segment

 

 

International

Operating

Segment

 

 

Total

 

Balance at January 1, 2017 (1)

 

$

1,164,163

 

 

$

98,800

 

 

$

1,262,963

 

Acquisitions of theatres (2)

 

 

9,878

 

 

 

20,401

 

 

 

30,279

 

Foreign currency translation adjustments

 

 

 

 

 

1,100

 

 

 

1,100

 

Balance at September 30, 2017 (1)

 

$

1,174,041

 

 

$

120,301

 

 

$

1,294,342

 

 

 

(1)

Balances are presented net of accumulated impairment losses of $214,031 for the U.S. operating segment and $27,622 for the international operating segment.

 

(2)

Represents preliminary purchase price allocations associated with the acquisitions of theatres.

The Company evaluates goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of the goodwill may not be fully recoverable.  The Company evaluates goodwill for impairment at the reporting unit level and has allocated goodwill to the reporting unit based on an estimate of its relative fair value. Management considers the reporting unit to be each of its nineteen regions in the U.S. and seven countries internationally with Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Guatemala considered one reporting unit (the Company does not have goodwill recorded for all of its international locations).  For the year ended December 31, 2016, the Company performed a qualitative goodwill impairment assessment on all reporting units, in accordance with ASC Topic 350-20-35.  No events or changes in circumstances occurred during the nine months ended September 30, 2017 that indicated the carrying value of goodwill might exceed its estimated fair value.

17


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Intangible assets consisted of the following:

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

January 1,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

2017

 

 

Additions (1)

 

 

Amortization

 

 

Other (2)

 

 

2017

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

99,796

 

 

$

4,453

 

 

$

 

 

$

(1,332

)

 

$

102,917

 

Accumulated amortization

 

 

(64,606

)

 

 

 

 

(3,606

)

 

 

1,162

 

 

 

(67,050

)

Total net intangible assets with finite     lives

 

$

35,190

 

 

$

4,453

 

 

$

(3,606

)

 

$

(170

)

 

$

35,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradename

 

 

299,709

 

 

 

 

 

 

 

81

 

 

 

299,790

 

Total intangible assets — net

 

$

334,899

 

 

$

4,453

 

 

$

(3,606

)

 

$

(89

)

 

$

335,657

 

 

 

(1)

Amount represents preliminary fair values allocated to intangible assets acquired as part of the acquisitions of theatres.  

 

(2)

Amounts represent foreign currency translation adjustments and the write-off of a favorable lease associated with a closed domestic theatre.

For the year ended December 31, 2016, the Company performed a qualitative assessment for all indefinite-lived tradename assets other than its tradename in Ecuador, for which the Company performed a quantitative assessment.  For the year ended December 31, 2016, the Company also performed a quantitative test on its definite-lived tradename associated with certain of its Rave-branded theatres acquired in 2013.  No events or changes in circumstances occurred during the nine months ended September 30, 2017 that indicated the carrying value of its tradename assets might exceed their estimated fair values.

Estimated aggregate future amortization expense for intangible assets is as follows:

 

For the three months ended December 31, 2017

 

$

1,668

 

For the twelve months ended December 31, 2018

 

 

5,964

 

For the twelve months ended December 31, 2019

 

 

5,101

 

For the twelve months ended December 31, 2020

 

 

4,995

 

For the twelve months ended December 31, 2021

 

 

2,444

 

Thereafter

 

 

15,695

 

Total

 

$

35,867

 

 

10.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment indicators on a quarterly basis or whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. See discussion of the Company’s long-lived asset impairment evaluation process in “Critical Accounting Policies” in its Annual Report on Form 10-K for the year ended December 31, 2016, filed February 23, 2017.  As noted in the discussion, fair value is determined based on a multiple of cash flows, which was six and a half times for the evaluations performed during the nine months ended September 30, 2017 and 2016. As of September 30, 2017, the estimated aggregate fair value of the long-lived assets impaired during the nine months ended September 30, 2017 was approximately $5,367.

18


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

The long-lived asset impairment charges recorded during each of the periods presented are 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.

Below is a summary of impairment charges for the periods presented:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

U.S. theatre properties

 

$

1,054

 

 

$

406

 

 

$

1,411

 

 

$

1,500

 

International theatre properties

 

 

3,972

 

 

 

 

 

 

8,189

 

 

 

823

 

Impairment of long-lived assets

 

$

5,026

 

 

$

406

 

 

$

9,600

 

 

$

2,323

 

 

11.

Fair Value Measurements

The Company determines fair value measurements in accordance with FASB ASC Topic 820: Fair Value Measurements (“ASC Topic 820”), which establishes a fair value hierarchy under which an asset or liability is categorized based on the lowest level of input significant to its fair value measurement. The levels of input defined by ASC Topic 820 are as follows:

Level 1 – quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date;

Level 2 – other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 – unobservable and should be used to measure fair value to the extent that observable inputs are not available.

The Company did not have any assets or liabilities measured at fair value on a recurring basis under ASC Topic 820 as of December 31, 2016 or September 30, 2017.  

Below is a reconciliation of the beginning and ending balance for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:

 

 

 

Liabilities (1)

 

 

 

2016

 

Beginning balance - January 1

 

$

373

 

Total loss included in accumulated other comprehensive loss

 

 

71

 

Settlements included in interest expense

 

 

(444

)

Ending balance - September 30

 

$

 

 

 

(1)

The Company was previously party to an interest rate swap agreement, which expired in April 2016.  

The Company uses the market approach for fair value measurements on a nonrecurring basis in the impairment evaluations of its long-lived assets (see Note 9 and Note 10). See additional explanation of fair value measurement techniques used for long-lived assets, goodwill and intangible assets in “Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed February 23, 2017.  There were no changes in valuation techniques and there were no transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2017.  

12.

Foreign Currency Translation

The accumulated other comprehensive loss account in stockholders’ equity of $242,894 and $247,013 as of September 30, 2017 and December 31, 2016, respectively, primarily includes cumulative foreign currency adjustments of $243,020 and $247,047, respectively, from translating the financial statements of the Company’s international subsidiaries.

All foreign countries where the Company has operations are non-highly inflationary, and the local currency is the same as the functional currency in all of the locations. Thus, any fluctuation in the currency results in a cumulative foreign currency translation adjustment recorded to accumulated other comprehensive loss.  

19


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

A highly inflationary economy is defined as an economy with a cumulative inflation rate of approximately 100 percent or more over a three-year period. If a country’s economy is classified as highly inflationary, the financial statements of the foreign entity operating in that country must be remeasured to the functional currency of the reporting entity.  There has been a steady devaluation of the Argentine peso relative to the U.S. dollar in recent years.  The official cumulative inflation rate for Argentina over the last three years has not definitively reached 100 percent and remeasurement is not required.  The Company will continue to monitor the inflation on a quarterly basis to determine whether remeasurement is necessary.  

Below is a summary of the impact of translating the September 30, 2017 financial statements of the Company’s international subsidiaries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

Exchange Rate as of

 

 

Income (Loss) for The

 

Country

 

September 30, 2017

 

 

December 31, 2016

 

 

Nine Months Ended September 30, 2017

 

Brazil

 

 

3.17

 

 

 

3.26

 

 

$

6,700

 

Argentina

 

 

17.70

 

 

 

16.04

 

 

 

(5,918

)

Peru

 

 

3.35

 

 

 

3.45

 

 

 

1,133

 

Chile

 

 

640.60

 

 

 

679.09

 

 

 

3,136

 

All other

 

 

 

 

 

 

 

 

 

 

527

 

 

 

 

 

 

 

 

 

 

 

$

5,578

 

 

During the nine months ended September 30, 2017, the Company reclassified $1,551 of cumulative foreign currency translation adjustments, related to a Canadian subsidiary that was liquidated, from accumulated other comprehensive loss to foreign currency exchange gain on the condensed consolidated statement of income.

13.

Supplemental Cash Flow Information

 

The following is provided as supplemental information to the condensed consolidated statements of cash flows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash paid for interest

 

$

58,334

 

 

$

68,552

 

Cash paid for income taxes, net of refunds received

 

$

81,271

 

 

$

66,757

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in accounts payable and accrued expenses for the

   acquisition of theatre properties and equipment (1)

 

$

(5,947

)

 

$

132

 

Theatre properties acquired under capital lease

 

$

30,517

 

 

$

11,292

 

Investment in NCM – receipt of common units (see

   Note 6)

 

$

18,363

 

 

$

11,111

 

Dividends accrued on unvested restricted stock unit awards

 

$

(423

)

 

$

(360

)

 

(1)

Additions to theatre properties and equipment included in accounts payable as of September 30, 2017 and December 31, 2016 were $34,678 and $40,625, respectively.

14.

Segments

The Company manages its international market and its U.S. market as separate reportable operating segments, with the international segment consisting of operations in Brazil, Argentina, Chile, Colombia, Peru, Ecuador, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Guatemala, Bolivia, Curacao and Paraguay. Each segment’s revenue is derived from admissions and concession sales and other ancillary revenues. The Company uses Adjusted EBITDA, as shown in the reconciliation table below, as the primary measure of segment profit and loss to evaluate performance and allocate its resources. The Company does not report total assets by segment because that information is not used to evaluate the performance of or allocate resources between segments.

20


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Below is a breakdown of selected financial information by reportable operating segment:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

514,376

 

 

$

572,916

 

 

$

1,650,514

 

 

$

1,677,365

 

International

 

 

200,122

 

 

 

199,476

 

 

 

602,116

 

 

 

551,212

 

Eliminations

 

 

(3,750

)

 

 

(3,818

)

 

 

(11,077

)

 

 

(10,730

)

Total revenues

 

$

710,748

 

 

$

768,574

 

 

$

2,241,553

 

 

$

2,217,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

108,854

 

 

$

137,540

 

 

$

402,902

 

 

$

409,018

 

International

 

 

44,818

 

 

 

47,351

 

 

 

133,329

 

 

 

128,915

 

Total Adjusted EBITDA

 

$

153,672

 

 

$

184,891

 

 

$

536,231

 

 

$

537,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

65,612

 

 

$

75,839

 

 

$

221,604

 

 

$

175,218

 

International

 

 

14,318

 

 

 

22,984

 

 

 

41,126

 

 

 

55,128

 

Total capital expenditures

 

$

79,930

 

 

$

98,823

 

 

$

262,730

 

 

$

230,346

 

The following table sets forth a reconciliation of net income to Adjusted EBITDA:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

38,540

 

 

$

66,126

 

 

$

170,544

 

 

$

179,540

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

24,630

 

 

 

40,926

 

 

 

98,475

 

 

 

106,002

 

Interest expense (1)

 

 

26,317

 

 

 

26,659

 

 

 

79,208

 

 

 

81,980

 

Other income (2)

 

 

(13,168

)

 

 

(14,540

)

 

 

(33,180

)

 

 

(32,510

)

Loss on debt amendments and refinancing

 

 

 

 

 

 

 

 

246

 

 

 

13,284

 

Other cash distributions from equity investees (3)

 

 

2,402

 

 

 

1,391

 

 

 

17,321

 

 

 

9,660

 

Depreciation and amortization

 

 

58,052

 

 

 

54,187

 

 

 

174,545

 

 

 

155,874

 

Impairment of long-lived assets

 

 

5,026

 

 

 

406

 

 

 

9,600

 

 

 

2,323

 

Loss on sale of assets and other

 

 

8,576

 

 

 

6,940

 

 

 

9,464

 

 

 

10,985

 

Deferred lease expenses

 

 

(297

)

 

 

(162

)

 

 

(1,019

)

 

 

(809

)

Amortization of long-term prepaid rents

 

 

551

 

 

 

371

 

 

 

1,540

 

 

 

1,357

 

Share based awards compensation expense

 

 

3,043

 

 

 

2,587

 

 

 

9,487

 

 

 

10,247

 

Adjusted EBITDA

 

$

153,672

 

 

$

184,891

 

 

$

536,231

 

 

$

537,933

 

 

 

(1)

Includes amortization of debt issue costs.

 

(2)

Includes interest income, foreign currency exchange gain and equity in income of affiliates and excludes distributions from NCM.

 

(3)

Includes cash distributions received from equity investees that were recorded as a reduction of the respective investment balances (see Notes 6 and 7).  These distributions are reported entirely within the U.S. operating segment.

21


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Financial Information About Geographic Areas

Below is a breakdown of selected financial information by geographic area:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Revenues

 

2017

 

 

2016

 

 

2017

 

 

2016

 

U.S.

 

$

514,376

 

 

$

572,916

 

 

$

1,650,514

 

 

$

1,677,365

 

Brazil

 

 

81,545

 

 

 

85,051

 

 

 

264,085

 

 

 

231,556

 

Other international countries

 

 

118,577

 

 

 

114,425

 

 

 

338,031

 

 

 

319,656

 

Eliminations

 

 

(3,750

)

 

 

(3,818

)

 

 

(11,077

)

 

 

(10,730

)

Total

 

$

710,748

 

 

$

768,574

 

 

$

2,241,553

 

 

$

2,217,847

 

 

Theatre Properties and Equipment-net

 

September 30, 2017

 

 

December 31, 2016

 

U.S.

 

$

1,392,429

 

 

$

1,306,643

 

Brazil

 

 

194,171

 

 

 

197,896

 

Other international countries

 

 

205,006

 

 

 

199,997

 

Total

 

$

1,791,606

 

 

$

1,704,536

 

 

15

Related Party Transactions

The Company manages theatres for Laredo Theatre, Ltd. (“Laredo”). The Company is the sole general partner and owns 75% of the limited partnership interests of Laredo. Lone Star Theatres, Inc. owns the remaining 25% of the limited partnership interests in Laredo and is 100% owned by Mr. David Roberts, Lee Roy Mitchell’s son-in-law. Lee Roy Mitchell is the Company’s Chairman of the Board of Directors and directly and indirectly owns approximately 9% of the Company’s common stock. Under the agreement, management fees are paid by Laredo to the Company at a rate of 5% of annual theatre revenues up to $50,000 and 3% of annual theatre revenues in excess of $50,000. The Company recorded $451 and $410 of management fee revenues during the nine months ended September 30, 2017 and 2016, respectively. All such amounts are included in the Company’s condensed consolidated financial statements with the intercompany amounts eliminated in consolidation.

The Company has an Aircraft Time Sharing Agreement with Copper Beech Capital, LLC to use, on occasion, a private aircraft owned by Copper Beech Capital, LLC. Copper Beech Capital, LLC is owned by Mr. Mitchell and his wife, Tandy Mitchell. The private aircraft is used by Mr. Mitchell and other executives who accompany Mr. Mitchell to business meetings for the Company. The Company reimburses Copper Beech Capital, LLC for the actual costs of fuel usage and the expenses of the pilots, landing fees, storage fees and similar expenses incurred during the trip.  For the nine months ended September 30, 2017 and 2016, the aggregate amounts paid to Copper Beech Capital, LLC for the use of the aircraft was $89 and $94, respectively.

The Company leases 14 theatres and one parking facility from Syufy Enterprises, LP (“Syufy”) or affiliates of Syufy. Raymond Syufy is one of the Company’s directors and is an officer of the general partner of Syufy. Of these 15 leases, 14 have fixed minimum annual rent. The one lease without minimum annual rent has rent based upon a specified percentage of gross sales as defined in the lease. For the nine months ended September 30, 2017 and 2016, the Company paid total rent of approximately $18,844 and $17,806, respectively, to Syufy.

16.

Commitments and Contingencies

Joseph Amey, et al. v. Cinemark USA, Inc., Case No. 3:13cv05669, In the United States District Court for the Northern District of California, San Francisco Division. The case presents putative class action claims for damages and attorney’s fees arising from employee wage and hour claims under California law for alleged meal period, rest break, reporting time pay, unpaid wages, pay upon termination, and wage statements violations. The claims are also asserted as a representative action under the California Private Attorney General Act (“PAGA”). The Company denies the claims, denies that class certification is appropriate and denies that a PAGA representative action is appropriate, and is vigorously defending against the claims. The Company denies any violation of law and plans to vigorously defend against all claims. The Court recently determined that class certification is not appropriate and determined that a PAGA representative action is not appropriate. The plaintiff has appealed these rulings. The Company is unable to predict the outcome of this litigation or the range of potential loss.

22


CINEMARK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except share and per share data

 

Flagship Theatres of Palm Desert, LLC d/b/a Cinemas Palme D’Or v. Century Theatres, Inc., and Cinemark USA, Inc.; Superior Court of the State of California, County of Los Angeles.  Plaintiff in this case alleges that the Company violated California antitrust and unfair competition laws by engaging in “circuit dealing” with various motion picture distributors and tortuously interfered with Plaintiff’s business relationships.  Plaintiff seeks compensatory damages, trebling of those damages under California law, punitive damages, injunctive relief, attorneys’ fees, costs and interest.  Plaintiff also alleges that the Company’s conduct ultimately resulted in closure of its theatre in June 2016.  The Company denied the allegations.  In 2008, the Company moved for summary judgment on Plaintiff’s claims, arguing primarily that clearances between the theatres at issue were lawful and that Plaintiff lacked proof sufficient to support certain technical elements of its antitrust claims.  The trial court granted that motion and dismissed Plaintiff’s claims.  Plaintiff appealed and, in 2011, the Court of Appeal reversed, holding, among other things, that Plaintiff’s claims were not about the illegality of clearances but were focused, instead, on “circuit dealing.”  Having re-framed the claims in that manner, the Court of Appeal held that the trial court’s decision to limit discovery to the market where the theatres at issue operated was an error, as “circuit dealing” necessarily involves activities in different markets.  Upon return to the trial court, the parties engaged in additional, broadened discovery related to Plaintiff’s “circuit dealing” claim.  Thereafter, the Company moved again for summary judgment on all of Plaintiff’s claims.  That new motion for summary judgment was pending when, on or about April 11, 2014, the trial court granted the Company’s motion for terminating sanctions and entered a judgment dismissing the case with prejudice.  Plaintiff then appealed that second dismissal, seeking to have the judgment reversed and the case remanded to the trial court.  The Court of Appeal issued a ruling on May 24, 2016, reversing the granting of terminating sanctions and instead imposed a lesser evidentiary and damages preclusion sanction.  The case returned to the trial court on October 6, 2016.  The Company has denied Plaintiff’s allegations and is vigorously defending these claims.  The Company is unable to predict the outcome of this litigation or the range of potential loss.

The Company received a Civil Investigative Demand (“CID”) from the Antitrust Division of the United States Department of Justice. The CID relates to an investigation under Sections 1 and 2 of the Sherman Act. The Company also received CIDs from the Antitrust Section of the Office of the Attorney General of the State of Ohio and later from other states regarding similar inquiries under state antitrust laws. The CIDs request the Company to answer interrogatories, and produce documents, or both, related to the investigation of matters including film clearances, potential coordination and/or communication with other major theatre circuits and related joint ventures.  The Company intends to fully cooperate with all federal and state government agencies. Although the Company does not believe that it has violated any federal or state antitrust or competition laws, it cannot predict the ultimate scope, duration or outcome of these investigations.

From time to time, the Company is involved in various other legal proceedings arising from the ordinary course of its business operations, such as personal injury claims, employment matters, landlord-tenant disputes, patent claims and contractual disputes, some of which are covered by insurance. The Company believes its potential liability with respect to proceedings currently pending is not material, individually or in the aggregate, to the Company’s financial position, results of operations and cash flows.

 

 

 

23


 

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, Argentina, Chile, Colombia, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Guatemala, Bolivia, Curacao and Paraguay. As of September 30, 2017, we managed our business under two reportable operating segments – U.S. markets and international markets. See Note 14 to our condensed consolidated financial statements.

We generate revenues primarily from filmed entertainment box office receipts and concession sales with additional revenues from screen advertising sales and other revenue streams, such as vendor marketing promotions, studio trailer placements, meeting rentals and electronic video games located in some of our theatres. NCM provides our domestic theatres with various forms of in-theatre advertising. We also offer alternative entertainment, such as live and pre-recorded sports programs, concert events, the Metropolitan Opera, in-theatre gaming and other special events in our theatres through our joint venture, AC JV, LLC.  Our Flix Media initiative has also allowed us to expand our screen advertising and alternative content within our international circuit and to other international exhibitors.

Films leading the box office during the nine months ended September 30, 2017 included the carryover of Rogue One: A Star Wars Story and Hidden Figures and new releases such as Beauty and the Beast, Wonder Woman, Guardians of the Galaxy Vol. 2, Spider Man: Homecoming, It, Despicable Me 3, Logan, The Fate of the Furious, Dunkirk, The LEGO Batman Movie, Get Out, The Boss Baby, Pirates of the Caribbean: Dead Men Tell No Tales, Kong: Skull Island and other films. Films scheduled for release during the remainder of 2017 include Jumanji: Welcome to the Jungle and Coco and well-known franchise films such as Star Wars: The Last Jedi, Justice League, Pitch Perfect 3 and Thor: Ragnarok 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.  Advertising costs, which are expensed as incurred, are primarily related to campaigns for new and renovated theatres and brand advertising that vary depending on the timing of such campaigns.

Concession supplies expense is variable in nature and fluctuates with our concession revenues. 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. In some international locations, staffing levels are also subject to local regulations.

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 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 performance 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 both fixed and variable costs and primarily consist of utilities, expenses for projection and sound equipment maintenance and monitoring, property taxes, janitorial costs, repairs, maintenance and security services.

24


 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating data (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions

 

$

425.1

 

 

$

472.9

 

 

$

1,351.5

 

 

$

1,364.8

 

Concession

 

 

247.1

 

 

 

261.4

 

 

 

777.6

 

 

 

752.8

 

Other

 

 

38.6

 

 

 

34.3

 

 

 

112.5

 

 

 

100.3

 

Total revenues

 

$

710.8

 

 

$

768.6

 

 

$

2,241.6

 

 

$

2,217.9

 

Cost of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film rentals and advertising

 

 

226.2

 

 

 

249.8

 

 

 

725.6

 

 

 

733.1

 

Concession supplies

 

 

40.2

 

 

 

41.9

 

 

 

124.1

 

 

 

117.0

 

Salaries and wages

 

 

87.3

 

 

 

84.4

 

 

 

261.3

 

 

 

243.8

 

Facility lease expense

 

 

82.0

 

 

 

82.8

 

 

 

248.6

 

 

 

241.9

 

Utilities and other

 

 

92.4

 

 

 

95.0

 

 

 

271.8

 

 

 

265.5

 

General and administrative expenses

 

 

36.9

 

 

 

35.3

 

 

 

113.0

 

 

 

109.2

 

Depreciation and amortization

 

 

58.1

 

 

 

54.2

 

 

 

174.5

 

 

 

155.9

 

Impairment of long-lived assets

 

 

5.0

 

 

 

0.4

 

 

 

9.6

 

 

 

2.3

 

Loss on sale of assets and other

 

 

8.6

 

 

 

7.0

 

 

 

9.5

 

 

 

11.0

 

Total cost of operations

 

 

636.7

 

 

 

650.8

 

 

 

1,938.0

 

 

 

1,879.7

 

Operating income

 

$

74.1

 

 

$

117.8

 

 

$

303.6

 

 

$

338.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data as a percentage of total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions

 

 

59.8

%

 

 

61.5

%

 

 

60.3

%

 

 

61.5

%

Concession

 

 

34.8

%

 

 

34.0

%

 

 

34.7

%

 

 

33.9

%

Other

 

 

5.4

%

 

 

4.5

%

 

 

5.0

%

 

 

4.6

%

Total revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of operations (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film rentals and advertising

 

 

53.2

%

 

 

52.8

%

 

 

53.7

%

 

 

53.7

%

Concession supplies

 

 

16.3

%

 

 

16.0

%

 

 

16.0

%

 

 

15.5

%

Salaries and wages

 

 

12.3

%

 

 

11.0

%

 

 

11.7

%

 

 

11.0

%

Facility lease expense

 

 

11.5

%

 

 

10.8

%

 

 

11.1

%

 

 

10.9

%

Utilities and other

 

 

13.0

%

 

 

12.4

%

 

 

12.1

%

 

 

12.0

%

General and administrative expenses

 

 

5.2

%

 

 

4.6

%

 

 

5.0

%

 

 

4.9

%

Depreciation and amortization

 

 

8.2

%

 

 

7.1

%

 

 

7.8

%

 

 

7.0

%

Impairment of long-lived assets

 

 

0.7

%

 

 

0.1

%

 

 

0.4

%

 

 

0.1

%

Loss on sale of assets and other

 

 

1.2

%

 

 

0.9

%

 

 

0.4

%

 

 

0.5

%

Total cost of operations

 

 

89.6

%

 

 

84.7

%

 

 

86.5

%

 

 

84.8

%

Operating income

 

 

10.4

%

 

 

15.3

%

 

 

13.5

%

 

 

15.2

%

Average screen count (month end average)

 

 

5,939

 

 

 

5,880

 

 

 

5,914

 

 

 

5,846

 

Average operating screen count (month end average)

 

 

5,749

 

 

 

5,785

 

 

 

5,764

 

 

 

5,771

 

Revenues per average screen (dollars)

 

$

119,675

 

 

$

130,710

 

 

$

379,025

 

 

$

379,379

 

 

(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.

25


 

Three months ended September 30, 2017 versus September 30, 2016

Revenues. Total revenues decreased $57.8 million to $710.8 million for the three months ended September 30, 2017 (“third quarter of 2017”) from $768.6 million for the three months ended September 30, 2016 (“third quarter of 2016”), representing a 7.5% decrease. The table below, presented by reportable operating segment, summarizes our revenue performance and certain key performance indicators for the three months ended September 30, 2017 and 2016.

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constant

Currency (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

%

Change

 

 

2017

 

 

2016

 

 

%

Change

 

 

2017

 

 

%

Change

 

 

2017

 

 

2016

 

 

%

Change

 

Admissions revenues (1)

 

$

312.3

 

 

$

354.9

 

 

 

(12.0

)%

 

$

112.8

 

 

$

118.0

 

 

 

(4.4

)%

 

$

115.4

 

 

 

(2.2

)%

 

$

425.1

 

 

$

472.9

 

 

 

(10.1

)%

Concession revenues (1)

 

$

181.5

 

 

$

197.5

 

 

 

(8.1

)%

 

$

65.6

 

 

$

63.9

 

 

 

2.7

%

 

$

67.0

 

 

 

4.9

%

 

$

247.1

 

 

$

261.4

 

 

 

(5.5

)%

Other revenues (1)(2)

 

$

16.9

 

 

$

16.7

 

 

 

1.2

%

 

$

21.7

 

 

$

17.6

 

 

 

23.3

%

 

$

22.2

 

 

 

26.1

%

 

$

38.6

 

 

$

34.3

 

 

 

12.5

%

Total revenues (1)(2)

 

$

510.7

 

 

$

569.1

 

 

 

(10.3

)%

 

$

200.1

 

 

$

199.5

 

 

 

0.3

%

 

$

204.6

 

 

 

2.6

%

 

$

710.8

 

 

$

768.6

 

 

 

(7.5

)%

Attendance (1)

 

 

40.6

 

 

 

48.0

 

 

 

(15.4

)%

 

 

26.7

 

 

 

28.2

 

 

 

(5.3

)%

 

 

 

 

 

 

 

 

 

 

67.3

 

 

 

76.2

 

 

 

(11.7

)%

Average ticket price (1)

 

$

7.69

 

 

$

7.39

 

 

 

4.1

%

 

$

4.22

 

 

$

4.18

 

 

 

1.0

%

 

$

4.32

 

 

 

3.3

%

 

$

6.32

 

 

$

6.21

 

 

 

1.8

%

Concession revenues per patron (1)

 

$

4.47

 

 

$

4.11

 

 

 

8.8

%

 

$

2.46

 

 

$

2.27

 

 

 

8.4

%

 

$

2.51

 

 

 

10.6

%

 

$

3.67

 

 

$

3.43

 

 

 

7.0

%

 

(1)

Revenues and attendance amounts in millions.  Average ticket price is calculated as admissions revenues divided by attendance.  Concession revenues per patron is calculated as concession revenues divided by attendance.  

(2)

U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 14 to our condensed consolidated financial statements.

(3)

Constant currency revenue amounts, which are non-GAAP measurements, were calculated using the average exchange rate for the corresponding month for 2016. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign exchange rates from one period to the next can result in meaningful variations in reported results.   We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

U.S. Admissions revenues decreased $42.6 million primarily due to a 15.4% decrease in attendance, partially offset by a 4.1% increase in average ticket price. The decrease in concession revenues of $16.0 million was primarily due to the 15.4% decrease in attendance, partially offset by an 8.8% increase in concession revenues per patron. The decrease in attendance was due to a weaker slate of films in the third quarter of 2017 compared to the third quarter of 2016, partially offset by the favorable impact of luxury lounger conversions and 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, price increases and new theatres.  

International. Admissions revenues decreased $5.2 million as reported primarily due to a 5.3% decrease in attendance, partially offset by a 1.0% increase in average ticket price.  Admissions revenues decreased $2.6 million in constant currency, primarily due to the 5.3% decrease in attendance, partially offset by a 3.3% increase in constant currency average ticket price. Concession revenues increased $1.7 million as reported primarily due to an 8.4% increase in concession revenues per patron, partially offset by the 5.3% decrease in attendance.  Concession revenues increased $3.1 million in constant currency, primarily due to a 10.6% increase in constant currency concession revenues per patron, partially offset by the 5.3% decrease in attendance. The decrease in attendance was driven by a weaker slate of films during the third quarter of 2017 compared to the third quarter of 2016, partially offset by the impact of new theatres.  Average ticket price and concession revenues per patron increased primarily due to price increases, which were predominantly driven by local inflation. Other revenues increased primarily due to incremental screen advertising revenues generated by an expansion of our Flix Media services to affiliates in various countries and increased promotional income.

Cost of Operations. The table below summarizes our theatre operating costs (in millions) by reportable operating segment for the three months ended September 30, 2017 and 2016.

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Constant

Currency

2017 (1)

 

 

2017

 

 

2016

 

Film rentals and advertising

 

$

171.5

 

 

$

193.6

 

 

$

54.7

 

 

$

56.2

 

 

$

56.2

 

 

$

226.2

 

 

$

249.8

 

Concession supplies

 

 

26.2

 

 

 

28.2

 

 

 

14.0

 

 

 

13.7

 

 

 

14.2

 

 

 

40.2

 

 

 

41.9

 

Salaries and wages

 

 

64.6

 

 

 

63.2

 

 

 

22.7

 

 

 

21.2

 

 

 

23.5

 

 

 

87.3

 

 

 

84.4

 

Facility lease expense

 

 

59.8

 

 

 

60.5

 

 

 

22.2

 

 

 

22.3

 

 

 

22.4

 

 

 

82.0

 

 

 

82.8

 

Utilities and other

 

 

64.0

 

 

 

66.9

 

 

 

28.4

 

 

 

28.1

 

 

 

29.0

 

 

 

92.4

 

 

 

95.0

 

 

(1)

Constant currency expense amounts, which are non-GAAP measurements were calculated using the average exchange rate for the corresponding month for 2016. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

26


 

U.S. Film rentals and advertising costs were $171.5 million, or 54.9% of admissions revenues, for the third quarter of 2017 compared to $193.6 million, or 54.6% of admissions revenues, for the third quarter of 2016. The increase in the film rentals and advertising rate was primarily due to a higher box office concentration of top performing films during the third quarter of 2017. Concession supplies expense was $26.2 million, or 14.4% of concession revenues, for the third quarter of 2017 compared to $28.2 million, or 14.3% of concession revenues, for the third quarter of 2016.

Salaries and wages increased to $64.6 million for the third quarter of 2017 from $63.2 million for the third quarter of 2016 primarily due to staffing at new and recently remodeled theatres, increases in minimum wages and staffing for food and beverage initiatives. Facility lease expense decreased to $59.8 million for the third quarter of 2017 from $60.5 million for the third quarter of 2016 due to decreased percentage rent due to the decline in revenues. Utilities and other costs decreased to $64.0 million for the third quarter of 2017 from $66.9 million for the third quarter of 2016 primarily due to decreased equipment lease expenses for 3-D presentations.

International. Film rentals and advertising costs were $54.7 million ($56.2 million in constant currency), or 48.5% of admissions revenues, for the third quarter of 2017 compared to $56.2 million, or 47.6% of admissions revenues, for the third quarter of 2016. The increase in the film rental and advertising rate was primarily due to the mix of film product during the third quarter of 2017 compared to the third quarter of 2016 and increased advertising costs during the third quarter of 2017.  Concession supplies expense was $14.0 million ($14.2 million in constant currency), or 21.3% of concession revenues, for the third quarter of 2017 compared to $13.7 million, or 21.4% of concession revenues, for the third quarter of 2016.

Salaries and wages increased to $22.7 million ($23.5 million in constant currency) for the third quarter of 2017 compared to $21.2 for the third quarter of 2016.  The as reported increase was due to new theatres and growth in wages as a result of inflation.  Facility lease expense decreased to $22.2 million (increased to $22.4 million in constant currency) for the third quarter of 2017 compared to $22.3 million for the third quarter of 2016.  The as reported decrease was due to decreased percentage rent due to the decline in revenues.  Utilities and other costs increased to $28.4 million ($29.0 million in constant currency) for the third quarter of 2017 compared to $28.1 million for the third quarter of 2016.  The as reported increase was due to increases in utility expenses and the impact of new theatres.    

General and Administrative Expenses. General and administrative expenses increased to $36.9 million for the third quarter of 2017 from $35.3 million for the third quarter of 2016. The increase was primarily due to increased salaries, professional fees and share based award compensation expense.

Depreciation and Amortization. Depreciation and amortization expense increased to $58.1 million during the third quarter of 2017 compared to $54.2 million during the third quarter of 2016. The increase was primarily due to theatre remodels and new theatres.

Impairment of Long-Lived Assets.  We recorded asset impairment charges on assets held and used of $5.0 million during the third quarter of 2017 compared to $0.4 million during the third quarter of 2016. 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. Impairment charges for the third quarter of 2017 impacted nine of our twenty-six reporting units. See Note 10 to our condensed consolidated financial statements.

Loss on Sale of Assets and Other. We recorded a loss on sale of assets and other of $8.6 million during the third quarter of 2017 compared to $7.0 million during the third quarter of 2016. Activity for the third quarter of 2017 and the third quarter of 2016 was primarily due to the retirement of assets related to theatre remodels.  

Interest Expense.  Interest costs incurred, including amortization of debt issue costs, were $26.3 million during the third quarter of 2017 compared to $26.7 million during the third quarter of 2016.  The decrease was due to amendments to our senior secured credit facility completed during June and December of 2016 and June of 2017 which, in the aggregate, reduced the rate at which our term loan accrues interest by 100 basis points.  

Distributions from NCM.  We recorded a distribution from NCM of $2.1 million during the third quarter of 2017 compared to $1.4 million recorded during the third quarter of 2016, 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 $10.9 million during the third quarter of 2017 compared to $12.4 million during the third quarter of 2016. See Notes 6 and 7 to our condensed consolidated financial statements for information about our equity investments.

Income Taxes. Income tax expense of $24.6 million was recorded for the third quarter of 2017 compared to $40.9 million recorded for the third quarter of 2016. The effective tax rate was approximately 39.0% for the third quarter of 2017 compared to

27


 

38.2% for the third quarter of 2016. 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.

Nine months ended September 30, 2017 versus September 30, 2016

Revenues. Total revenues increased $23.7 million to $2,241.6 million for the nine months ended September 30, 2017 (“the 2017 period”) from $2,217.9 million for the nine months ended September 30, 2016 (“the 2016 period”), representing a 1.1% increase. The table below, presented by reportable operating segment, summarizes our revenue performance and certain key performance indicators or the nine months ended September 30, 2017 and 2016.

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constant

Currency (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

%

Change

 

 

2017

 

 

2016

 

 

%

Change

 

 

2017

 

 

%

Change

 

 

2017

 

 

2016

 

 

%

Change

 

Admissions revenues (1)

 

$

1,003.5

 

 

$

1,037.7

 

 

 

(3.3

)%

 

$

348.0

 

 

$

327.1

 

 

 

6.4

%

 

$

336.4

 

 

 

2.8

%

 

$

1,351.5

 

 

$

1,364.8

 

 

 

(1.0

)%

Concession revenues (1)

 

$

582.2

 

 

$

575.3

 

 

 

1.2

%

 

$

195.4

 

 

$

177.5

 

 

 

10.1

%

 

$

190.0

 

 

 

7.0

%

 

$

777.6

 

 

$

752.8

 

 

 

3.3

%

Other revenues (1)(2)

 

$

53.8

 

 

$

53.6

 

 

 

0.4

%

 

$

58.7

 

 

$

46.7

 

 

 

25.7

%

 

$

57.2

 

 

 

22.5

%

 

$

112.5

 

 

$

100.3

 

 

 

12.2

%

Total revenues (1)(2)

 

$

1,639.5

 

 

$

1,666.6

 

 

 

(1.6

)%

 

$

602.1

 

 

$

551.3

 

 

 

9.2

%

 

$

583.6

 

 

 

5.9

%

 

$

2,241.6

 

 

$

2,217.9

 

 

 

1.1

%

Attendance (1)

 

 

130.1

 

 

 

138.0

 

 

 

(5.7

)%

 

 

80.9

 

 

 

83.7

 

 

 

(3.3

)%

 

 

 

 

 

 

 

 

 

 

211.0

 

 

 

221.7

 

 

 

(4.8

)%

Average ticket price (1)

 

$

7.71

 

 

$

7.52

 

 

 

2.5

%

 

$

4.30

 

 

$

3.91

 

 

 

10.0

%

 

$

4.16

 

 

 

6.4

%

 

$

6.41

 

 

$

6.16

 

 

 

4.1

%

Concession revenues per patron (1)

 

$

4.48

 

 

$

4.17

 

 

 

7.4

%

 

$

2.42

 

 

$

2.12

 

 

 

14.2

%

 

$

2.35

 

 

 

10.8

%

 

$

3.69

 

 

$

3.40

 

 

 

8.5

%

 

(1)

Revenues and attendance amounts in millions.  Average ticket price is calculated as admissions revenues divided by attendance.  Concession revenues per patron is calculated as concession revenues divided by attendance.  

(2)

U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 14 to our condensed consolidated financial statements.

(3)

Constant currency revenue amounts, which are non-GAAP measurements, were calculated using the average exchange rate for the corresponding month for 2016. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign exchange rates from one period to the next can result in meaningful variations in reported results.   We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

U.S. Admissions revenues decreased $34.2 million primarily due to a 5.7% decrease in attendance, partially offset by a 2.5% increase in average ticket price. Concession revenues increased $6.9 million primarily due to a 7.4% increase in concession revenues per patron, partially offset by the 5.7% decrease in attendance. The decrease in attendance was due to a weaker slate of films in the 2017 period compared to the 2016 period, partially offset by the favorable impact of luxury lounger conversions and 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, price increases and new theatres.  

International. Admissions revenues increased $20.9 million as reported primarily due to a 10.0% increase in average ticket price, partially offset by a 3.3% decrease in attendance.  Admissions revenues increased $9.3 million in constant currency, primarily due to a 6.4% increase in constant currency average ticket price, partially offset by the 3.3% decrease in attendance. Concession revenues increased $17.9 million as reported primarily due to a 14.2% increase in concession revenues per patron, partially offset by the 3.3% decrease in attendance.  Concession revenues increased $12.5 million in constant currency, primarily due to a 10.8% increase in constant currency concession revenues per patron, partially offset by the 3.3% decrease in attendance. The decrease in attendance was driven by a weaker slate of films during the 2017 period compared to the 2016 period, partially offset by the impact of new theatres.  Average ticket price and concession revenues per patron increased primarily due to price increases, which were predominantly driven by local inflation.  Other revenues increased primarily due to incremental screen advertising revenues generated by an expansion of our Flix Media services to affiliates in various countries and increased promotional income.

28


 

Cost of Operations. The table below summarizes our theatre operating costs (in millions) by reportable operating segment for the nine months ended September 30, 2017 and 2016.

 

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Constant

Currency

2017 (1)

 

 

2017

 

 

2016

 

Film rentals and advertising

 

$

558.3

 

 

$

578.2

 

 

$

167.3

 

 

$

154.9

 

 

$

162.2

 

 

$

725.6

 

 

$

733.1

 

Concession supplies

 

 

82.1

 

 

 

79.9

 

 

 

42.0

 

 

 

37.1

 

 

 

40.8

 

 

 

124.1

 

 

 

117.0

 

Salaries and wages

 

 

194.5

 

 

 

183.1

 

 

 

66.8

 

 

 

60.7

 

 

 

65.9

 

 

 

261.3

 

 

 

243.8

 

Facility lease expense

 

 

181.1

 

 

 

179.7

 

 

 

67.5

 

 

 

62.2

 

 

 

64.9

 

 

 

248.6

 

 

 

241.9

 

Utilities and other

 

 

185.1

 

 

 

188.0

 

 

 

86.7

 

 

 

77.5

 

 

 

84.4

 

 

 

271.8

 

 

 

265.5

 

 

(1)

Constant currency expense amounts, which are non-GAAP measurements were calculated using the average exchange rate for the corresponding month for 2016. We translate the results of our international operating segment from local currencies into U.S. dollars using currency rates in effect at different points in time in accordance with U.S. GAAP. Significant changes in foreign exchange rates from one period to the next can result in meaningful variations in reported results. We are providing constant currency amounts for our international operating segment to present a period-to-period comparison of business performance that excludes the impact of foreign currency fluctuations.

U.S. Film rentals and advertising costs were $558.3 million, or 55.6% of admissions revenues for the 2017 period compared to $578.2 million, or 55.7% of admissions revenues for the 2016 period. The decrease in the film rentals and advertising rate was primarily due to a higher concentration of blockbuster films during the 2016 period. Concession supplies expense was $82.1 million, or 14.1% of concession revenues, for the 2017 period compared to $79.9 million, or 13.9% of concession revenues, for the 2016 period. The increase in the concession supplies rate was primarily due to the impact of our expanded concession offerings.

Salaries and wages increased to $194.5 million for the 2017 period from $183.1 million for the 2016 period primarily due to staffing at new and recently remodeled theatres, increases in minimum wages and staffing for food and beverage initiatives. Facility lease expense increased to $181.1 million for the 2017 period from $179.7 million for the 2016 period due to the impact of new theatres. Utilities and other costs decreased to $185.1 million for the 2017 period from $188.0 million for the 2016 period primarily due to decreases in equipment lease expenses for 3-D presentations, partially offset by increased utilities, repairs and maintenance, and janitorial services expenses.  

International. Film rentals and advertising costs were $167.3 million ($162.2 million in constant currency), or 48.1% of admissions revenues, for the 2017 period compared to $154.9 million, or 47.4% of admissions revenues, for the 2016 period. The increase in the film rentals and advertising rate was primarily due to higher advertising costs during the 2017 period.  Concession supplies expense was $42.0 million ($40.8 million in constant currency), or 21.5% of concession revenues, for the 2017 period compared to $37.1 million, or 20.9% of concession revenues, for the 2016 period. The increase in the concession supplies rate was primarily due to the mix of concession products sold.

Salaries and wages increased to $66.8 million ($65.9 million in constant currency) for the 2017 period compared to $60.7 million for the 2016 period.  The as reported increase was due to new theatres, increased local currency wage rates, limited flexibility in scheduling staff caused by shifting government regulations and the impact of changes in foreign currency exchange rates in certain countries in which we operate.  Facility lease expense increased to $67.5 million ($64.9 million in constant currency) for the 2017 period compared to $62.2 million for the 2016 period.  The as reported increase was due to the impact of changes in foreign currency exchange rates in certain countries in which we operate and new theatres.  Utilities and other costs increased to $86.7 million ($84.4 million in constant currency) for the 2017 period compared to $77.5 million for the 2016 period.  The as reported increase was due to the impact of changes in foreign currency exchange rates in certain countries in which we operate, increases in repairs and maintenance expenses and utility expenses and the impact of new theatres.    

General and Administrative Expenses. General and administrative expenses increased to $113.0 million for the 2017 period from $109.2 million for the 2016 period. The increase was primarily due to increased salaries and wages, professional fees and the impact of changes in foreign currency exchange rates in certain countries in which we operate, partially offset by a decrease in share based award compensation expense.  

Depreciation and Amortization. Depreciation and amortization expense was $174.5 million for the 2017 period compared to $155.9 million for the 2016 period. The increase was primarily due to theatre remodels and new theatres.

Impairment of Long-Lived Assets.  We recorded asset impairment charges on assets held and used of $9.6 million for the 2017 period compared to $2.3 million for the 2016 period. 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

29


 

demographics or adverse changes in the development or the conditions of the areas surrounding the theatre. Impairment charges for the 2017 period impacted thirteen of our twenty-six reporting units. See Note 10 to our condensed consolidated financial statements.

Loss on Sale of Assets and Other. We recorded a loss on sale of assets and other of $9.5 million during the 2017 period compared to $11.0 million during the 2016 period. The loss recorded during the 2017 period included the retirement of assets due to theatre remodels and closures, partially offset by gains related to the sale of excess land parcels and a gain on a landlord buyout of a theatre lease.  The loss recorded during the 2016 period was primarily related to the retirement of assets due to theatre remodels and closures, partially offset by a gain on the sale of our investment in RealD stock.

Interest Expense.  Interest costs incurred, including amortization of debt issue costs, were $79.2 million for the 2017 period compared to $82.0 million for the 2016 period.  The decrease was due to the redemption of our previously outstanding $200.0 million 7.375% senior subordinated notes (the “7.375% Senior Subordinated Notes”) funded by a $225.0 million add-on to our 4.875% senior notes (the “4.875% Senior Notes), which occurred on March 21, 2016, as well as amendments to our senior secured credit facility completed during June and December of 2016 and June of 2017, which, in the aggregate, reduced the rate at which our term loan accrues interest by 100 basis points.  

Loss On Debt Amendments and Refinancing.  We recorded a loss of $0.2 million during the 2017 period related to an amendment to our senior secured credit facility that included a reduction in the interest rate at which our term loan accrues interest and revisions to certain definitions within the agreement.  See Note 4 to our condensed consolidated financial statements.  We recorded a loss of $13.3 million during the 2016 period primarily related to the early redemption of our $200.0 million 7.375% Senior Subordinated Notes.  

Foreign Currency Exchange Gain.  We recorded a foreign currency exchange gain of $2.0 million during the 2017 period compared to a foreign currency exchange gain of $2.9 million during the 2016 period. These amounts primarily represent the impact of changes in foreign currency exchange rates on intercompany transactions between our domestic subsidiaries and our international subsidiaries.  See Note 12 to the condensed consolidated financial statements for further discussion.

Distributions from NCM.  We recorded distributions from NCM of $11.7 million during the 2017 period and $10.1 million during the 2016 period, 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 $26.8 million during the 2017 period compared to $24.6 million during the 2016 period. See Notes 6 and 7 for information about the equity investments to our condensed consolidated financial statements.

Income Taxes. Income tax expense of $98.5 million was recorded for the 2017 period compared to $106.0 million recorded for the 2016 period. The effective tax rate was 36.6% for the 2017 period compared to 37.1% for the 2016 period.  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.

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, nearly all of our theatres provide the patron a choice of using a credit card, debit card or advanced-sale type certificates such as a gift 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 $311.4 million for the nine months ended September 30, 2017 compared to $278.3 million for the nine months ended September 30, 2016.

Investing Activities

Our investing activities have been principally related to the development, remodel 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 $290.1 million for the nine months ended September 30, 2017 compared to $230.5 million for the nine months ended September 30, 2016.  The increase was primarily due to an increase in capital expenditures for the remodel of certain of our existing domestic theatres and the acquisition of one theatre in the U.S. and two theatres in Brazil.  

30


 

Capital expenditures for the nine months ended September 30, 2017 and 2016 were as follows (in millions):

 

Period

 

New

Theatres

 

 

Existing

Theatres (1)

 

 

Total

 

Nine Months Ended September 30, 2017

 

$

42.5

 

 

$

220.2

 

 

$

262.7

 

Nine Months Ended September 30, 2016

 

$

65.6

 

 

$

164.7

 

 

$

230.3

 

 

 

(1)

The amounts for the nine months ended September 30, 2017 and 2016 include $5.7 million and $3.6 million, respectively, related to the remodel of our corporate headquarters building in Plano, TX.

Capital expenditures for existing properties in the table above includes the costs of remodeling certain of our existing theatres to include Luxury Loungers and expanded concession offerings.  During the nine months ended September 30, 2017 and 2016, we had an average of 151 and 75 of our domestic screens, respectively, temporarily closed for such remodels.

Our U.S. theatre circuit consisted of 339 theatres with 4,562 screens at September 30, 2017. During the nine months ended September 30, 2017, we built two new theatres with 18 screens, acquired one new theatre with 12 screens and closed three theatres and 27 screens. At September 30, 2017, we had signed commitments to open one new theatre and 10 screens in domestic markets during the remainder of 2017 and open ten new theatres with 106 screens subsequent to 2017. We estimate the remaining capital expenditures for the development of these 116 domestic screens will be approximately $85.0 million.

Our international theatre circuit consisted of 194 theatres with 1,395 screens at September 30, 2017. During the nine months ended September 30, 2017, we built five new theatres with 37 screens and acquired two theatres with 14 screens. At September 30, 2017, we had signed commitments to open one new theatre and six screens in international markets during the remainder of 2017 and open seven new theatres and 34 screens subsequent to 2017. We estimate the remaining capital expenditures for the development of these 40 international screens will be approximately $20.0 million.

Actual expenditures for continued theatre development, remodels 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 $114.2 million for the nine months ended September 30, 2017 compared to $111.3 million for the nine months ended September 30, 2016.  Financing activities for the nine months ended September 30, 2016 included the redemption of Cinemark USA, Inc.’s $200.0 million 7.375% Senior Subordinated Notes with proceeds from the issuance of a $225.0 million add-on to Cinemark USA, Inc.’s existing 4.875% Senior Notes.

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 balance, 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 September 30, 2017 (in millions):

 

Cinemark USA, Inc. term loan

 

$

660.9

 

Cinemark USA, Inc. 5.125% senior notes due 2022

 

 

400.0

 

Cinemark USA, Inc. 4.875% senior notes due 2023

 

 

755.0

 

Other

 

4.2

 

Total long-term debt

 

$

1,820.1

 

Less current portion

 

 

7.1

 

Subtotal long-term debt, less current portion

 

$

1,813.0

 

Less:  Debt discounts and debt issuance costs, net of accumulated amortization

 

 

31.0

 

Long-term debt, less current portion, net of debt issuance costs

 

$

1,782.0

 

 

31


 

As of September 30, 2017, Cinemark USA, Inc. had $100.0 million in available borrowing capacity on its revolving credit line.

Contractual Obligations

There have been no material changes in our contractual obligations previously disclosed in “Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017.

Off-Balance Sheet Arrangements

Other than the operating leases and purchase commitments disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017, we do not have any off-balance sheet arrangements.

Senior Secured Credit Facility

Cinemark USA, Inc. has a senior secured credit facility that includes a $700.0 million term loan, with a maturity date of May 2022, and a $100.0 million revolving credit line, with a maturity date of December 2017 (collectively referred to as the “Credit Agreement”).

On May 16, 2016, Cinemark USA, Inc. made a principal pre-payment of $13,451 using the proceeds received from the sale of shares of RealD.  In accordance with the terms of the Credit Agreement, the pre-payment was applied first to the next four principal installments, and second, to the remaining installments pro-rata based on the remaining outstanding principal amount of such installments.  Therefore, quarterly payments of $1.4 million are due on the term loan through March 31, 2022, with the remaining principal of $635.3 million due on May 8, 2022.  The Company did not incur any fees as a result of the pre-payment.

On June 13, 2016 and December 15, 2016, Cinemark USA, Inc. amended its Credit Agreement to reduce the rate at which the term loan bears interest by 0.25% and then an additional 0.50%, respectively.  On June 16, 2017, Cinemark USA, Inc. amended its Credit Agreement to further reduce the rate at which the term loan bears interest by 0.25% and also to modify certain definitions and other provisions within the Credit Agreement.  

Interest on the term loan accrues at Cinemark USA, Inc.’s option at: (A) the base rate equal to the greater of (1) the US “Prime Rate” as quoted in The Wall Street Journal or if no such rate is quoted therein, in a Federal Reserve Board statistical release, (2) the federal funds effective rate plus 0.50%, and (3) a one-month Eurodollar-based rate plus 1.0%, plus, in each case, a margin of 1.00% per annum, or (B) a Eurodollar-based rate for a period of 1, 2, 3, 6, 9 or 12 months plus a margin of 2.00% per annum. Interest on the revolving credit line accrues, at our option, at: (A) a base rate equal to the greater of (1) the US “Prime Rate” as quoted in The Wall Street Journal or if no such rate is quoted therein, in a Federal Reserve Board statistical release, (2) the federal funds effective rate plus 0.50%, and (3) a one-month Eurodollar-based rate plus 1.0%, plus, in each case, a margin that ranges from 1.00% to 1.75% per annum, or (B) a Eurodollar-based rate for a period of 1, 2, 3, 6, 9 or 12 months plus a margin that ranges from 2.00% to 2.75% per annum. The margin of the revolving credit line is determined by the consolidated net senior secured leverage ratio as defined in the Credit Agreement.  

At September 30, 2017, there was $660.9 million outstanding under the term loan and no borrowings outstanding under the revolving credit line. Cinemark USA, Inc. had $100.0 million in available borrowing capacity on the revolving credit line. The average interest rate on outstanding term loan borrowings under the Credit Agreement at September 30, 2017 was approximately 3.3% per annum.

Cinemark USA, Inc.’s obligations under the Credit Agreement are guaranteed by Cinemark Holdings, Inc. and certain of Cinemark USA, Inc.’s domestic subsidiaries and are secured by mortgages on certain fee and leasehold properties and security interests in substantially all of Cinemark USA, Inc.’s and the guarantors’ personal property, including, without limitation, pledges of all of Cinemark USA, Inc.’s capital stock, all of the capital stock of certain of Cinemark USA, Inc.’s domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on Cinemark USA, Inc.’s ability, and in certain instances, its subsidiaries’ and our ability, to consolidate or merge or liquidate, wind up or dissolve; substantially change the nature of its business; sell, transfer or dispose of assets; create or incur indebtedness; create liens; pay dividends or repurchase stock; and make capital expenditures and investments. If Cinemark USA, Inc. has borrowings outstanding on the revolving credit line, it is required to satisfy a consolidated net senior secured leverage ratio covenant as defined in the Credit Agreement.

The dividend restriction contained in the Credit Agreement prevents the Company and any of its subsidiaries from paying a dividend or otherwise distributing cash to its stockholders unless (1) the Company is not in default, and the distribution would not cause Cinemark USA, Inc. to be in default, under the Credit Agreement; and (2) the aggregate amount of certain dividends, distributions, investments, redemptions and capital expenditures made since December 18, 2012, including dividends declared by the

32


 

board of directors, is less than the sum of (a) the aggregate amount of cash and cash equivalents received by Cinemark Holdings, Inc. or Cinemark USA, Inc. as common equity since December 18, 2012, (b) Cinemark USA, Inc.’s consolidated EBITDA minus 1.75 times its consolidated interest expense, each as defined in the Credit Agreement, and (c) certain other defined amounts. As of September 30, 2017, Cinemark USA, Inc. could have distributed up to approximately $2,551.2 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the Credit Agreement, subject to its available cash and other borrowing restrictions outlined in the agreement.

Cinemark USA, Inc. 5.125% Senior Notes

On December 18, 2012, Cinemark USA, Inc. issued $400.0 million aggregate principal amount of 5.125% senior notes due 2022, at par value (the “5.125% Senior Notes”). Interest on the 5.125% Senior Notes is payable on June 15 and December 15 of each year, beginning June 15, 2013. The 5.125% Senior Notes mature on December 15, 2022.

The indenture to the 5.125% Senior Notes contains covenants including limitations on the amount of dividends that could be paid by Cinemark USA, Inc. As of September 30, 2017, Cinemark USA, Inc. could have distributed up to approximately $2,529.3 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the indenture to the 5.125% Senior Notes, subject to its available cash and other borrowing restrictions outlined in the indenture. The indenture allows Cinemark USA, Inc. to incur additional indebtedness if it satisfies the coverage ratio specified in the indenture, after giving effect to the incurrence of the additional indebtedness, and in certain other circumstances. The required minimum coverage ratio is 2 to 1 and our actual ratio as of September 30, 2017 was approximately 5.9 to 1.

Cinemark USA, Inc. 4.875% Senior Notes

On May 24, 2013, Cinemark USA, Inc. issued $530.0 million aggregate principal amount of the 4.875% Senior Notes due 2023, at par value (the “4.875% Senior Notes”). On March 21, 2016, Cinemark USA, Inc. issued an additional $225.0 million aggregate principal amount of the 4.875% Senior Notes at 99.0% of the principal amount plus accrued and unpaid interest from December 1, 2015. Proceeds, after payment of fees, were used to finance the redemption of Cinemark, USA, Inc.’s $200.0 million 7.375% Senior Subordinated Notes, as discussed below. These additional notes have identical terms, other than the issue date, the issue price and the first interest payment date, and constitute part of the same series as the Company’s existing 4.875% Senior Notes.  Interest on the 4.875% Senior Notes is payable on June 1 and December 1 of each year.  The 4.875% Senior Notes mature on June 1, 2023.  

The indenture to the 4.875% Senior Notes contains covenants that include limitations on the amount of dividends that Cinemark USA, Inc. can pay. As of September 30, 2017, Cinemark USA, Inc. could have distributed up to approximately $2,524.4 million to its parent company and sole stockholder, Cinemark Holdings, Inc., under the terms of the indenture to the 4.875% Senior Notes, subject to its available cash and other borrowing restrictions outlined in the indenture. The indenture allows Cinemark USA, Inc. to incur additional indebtedness if it satisfies the coverage ratio specified in the indenture, after giving effect to the incurrence of the additional indebtedness, and in certain other circumstances. The required minimum coverage ratio is 2 to 1 and our actual ratio as of September 30, 2017 was approximately 5.9 to 1.

Cinemark USA, Inc. 7.375% Senior Subordinated Notes

On June 3, 2011, Cinemark USA, Inc. issued $200.0 million aggregate principal amount of 7.375% Senior Subordinated Notes due 2021, at par value. On March 21, 2016, Cinemark USA, Inc. redeemed the 7.375% Senior Subordinated Notes at a make-whole premium of approximately 104% plus accrued and unpaid interest, utilizing the proceeds from the issuance of the additional $225.0 million 4.875% Senior Notes discussed above.  As a result of the redemption, the Company wrote-off approximately $2.4 million in unamortized debt issue costs, paid the make-whole premium of approximately $9.4 million and paid other fees of $1.2 million, all of which are reflected in loss on debt amendments and refinancing during the nine months ended September 30, 2016.  

Covenant Compliance

As of September 30, 2017, we believe we were in full compliance with all agreements, including all related covenants, governing our outstanding debt.

Seasonality

Our revenues have historically been seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, the most successful motion pictures have been released during the summer, extending from May to July, and during the holiday season, extending from early November through year-end. The unexpected emergence of a hit film during other periods can alter this seasonality trend. The timing of such film releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or for the same period in the following year.

 

33


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have exposure to financial market risks, including changes in interest rates, foreign currency exchange rates and other relevant market prices.  

Interest Rate Risk

We are currently party to a variable rate debt facility.  An increase or decrease in interest rates would affect our interest expense relating to our variable rate debt. At September 30, 2017, we had an aggregate of approximately $660.9 million of variable rate debt outstanding.  Based on the interest rates in effect on the variable rate debt outstanding at September 30, 2017, a 100 basis point increase in market interest rates would increase our annual interest expense by approximately $6.6 million.

The table below provides information about our fixed rate and variable rate long-term debt agreements as of September 30, 2017:

 

 

 

Expected Maturity for the Twelve-Month Periods Ending September 30,

 

 

Average

 

 

 

(in millions)

 

 

Interest

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

 

Fair Value

 

 

Rate

 

Fixed rate

 

$

1.4

 

 

$

1.4

 

 

$

1.4

 

 

$

 

 

$

 

 

$

1,155.0

 

 

$

1,159.2

 

 

$

1,177.2

 

 

 

5.0

%

Variable rate

 

 

5.7

 

 

 

5.7

 

 

 

5.7

 

 

 

5.7

 

 

 

638.1

 

 

 

 

 

 

660.9

 

 

663.4

 

 

 

3.3

%

Total debt

 

$

7.1

 

 

$

7.1

 

 

$

7.1

 

 

$

5.7

 

 

$

638.1

 

 

$

1,155.0

 

 

$

1,820.1

 

 

$

1,840.6

 

 

 

 

 

 

Foreign Currency Exchange Rate Risk

Other than the devaluation of the Argentine peso, discussed in Note 12 to the condensed consolidated financial statements, there have been no material changes in foreign currency exchange rate risk previously disclosed in “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017.

Item 4. Controls and Procedures

Evaluation of the Effectiveness of Disclosure Controls and Procedures

As of September 30, 2017, we carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 that occurred during the quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

34


 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes from legal proceedings previously reported under “Business – Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017.

Item 1A. Risk Factors

There have been no material changes from risk factors previously disclosed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017.

35


 

Item 6. Exhibits

 

*31.1

 

Certification of Mark Zoradi, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*31.2

 

Certification of Sean Gamble, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.1

 

Certification of Mark Zoradi, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.2

 

Certification of Sean Gamble, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

* 101

 

Financial Statements from the quarterly report on Form 10-Q of Cinemark Holdings, Inc. for the quarter ended September 30, 2017, filed November 3, 2017, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements tagged as detailed text.

 

*

filed herewith.

36


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

CINEMARK HOLDINGS, INC.

 

 

 

 

Registrant

 

 

 

 

 

DATE:

 

November 3, 2017

 

 

 

 

 

 

 

 

 

 

 

/s/Mark Zoradi

 

 

 

 

Mark Zoradi

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

/s/Sean Gamble

 

 

 

 

Sean Gamble

 

 

 

 

Chief Financial Officer

 

 

37