Quarterly report pursuant to Section 13 or 15(d)

Impact of COVID-19

v3.20.2
Impact of COVID-19
9 Months Ended
Sep. 30, 2020
Extraordinary And Unusual Items [Abstract]  
Impact of COVID-19

2.

Impact of COVID-19

The outbreak of the COVID-19 pandemic has had an unprecedented impact on the world and the movie exhibition industry. The social and economic effects are widespread, and the situation continues to evolve. As a movie exhibitor that operates spaces where patrons gather in close proximity, the Company has been, and continues to be, significantly impacted by protective actions taken by governmental authorities to control the spread of the pandemic. To comply with government mandates at the initial outbreak of the COVID-19 pandemic, the Company temporarily closed all of its theatres in the U.S. and Latin America effective March 17, 2020 and March 18, 2020, respectively. In conjunction with the temporary closure of its theatres in March 2020, the Company implemented temporary personnel and salary reductions, halted non-essential operating and capital expenditures, and negotiated modified timing and/or abatement of contractual payments with landlords and other major suppliers until its theatres reopened.  In addition, the Company suspended its quarterly dividend.

As of September 30, 2020, the Company had reopened 252 of its domestic theatres and 15 of its international theatres showing limited volume of new releases along with library content during reduced operating hours.  While some staffing has been brought back to pre-COVID-19 levels given the theatre reopenings, the Company continues to maintain a temporary reduction in staffing while limiting capital expenditures to essential activities and projects.  The Company also continues to work with landlords and other vendors on extended or modified contractual payment terms while evaluating the status of the COVID-19 pandemic and local government regulations in assessing its plans to reopen its remaining theatres.  

The Company’s focus on maintaining a healthy balance sheet and low leverage allowed it to enter the global COVID-19 crisis in a strong financial position. Based on the Company’s current level of operations, it believes that it has sufficient cash to sustain operations until late 2021, which would extend into 2022 when considering the additional income tax benefits discussed below. Nonetheless, the COVID-19 pandemic has had, and may continue to have, adverse effects on the Company’s business, results of operations, cash flows, financial condition, access to credit markets and ability to service existing and future indebtedness, some of which may be significant.

Health and Safety Protocols

The Company has implemented health and safety protocols in its theatres as a result of the pandemic for the safety of its employees and guests including, but not limited to, the following:

 

staggering showtimes and limiting capacities to maximize physical distancing

 

instituting a seat buffering technology to ensure social distancing within the auditorium

 

requiring face masks for all guests within the theater, which may only be removed for eating and drinking in the auditoriums

 

implementing stringent disinfecting and sanitizing protocols and providing ample supplies of hand sanitizer and seat wipes for patrons

 

delivering an abundant supply of fresh outdoor air, maintaining optimal air circulation and eliminating potential pollutants through filtration

 

encouraging contactless transactions

 

requiring that employees receive special training, participate in wellness check-ins and use personal protective wear, including face masks and gloves

With these comprehensive health and safety protocols in place, we believe we can more safely operate theaters while prioritizing the health of employees, guests and communities. The Company will continue to evolve these protocols based on changes to recommendations by local authorities throughout the region, as well as based on the Company’s experience as it reopens theatres domestically and throughout Latin America.  

 

Restructuring Charges

 

In addition to the Company’s initial actions in response to the COVID-19 pandemic discussed above, during June 2020, Company management approved and announced a restructuring plan to realign its operations creating a more efficient cost structure (referred to herein as the “2020 Restructuring Plan”).  The 2020 Restructuring Plan primarily includes a permanent headcount reduction at its domestic corporate office and the permanent closure of 14 domestic and 7 international theatres.  The Company recorded $524 and $20,062 in restructuring costs on the condensed consolidated statement of income for the three and nine months ended September 30, 2020, respectively.  The following table summarizes the costs of the 2020 Restructuring Plan, payments made, noncash write-offs and the remaining liability at September 30, 2020:

 

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

Restructuring charges during the three months ended June 30, 2020

 

$

8,955

 

$

7,589

 

$

16,544

 

 

$

163

 

$

2,831

 

$

2,994

 

 

$

9,118

 

$

10,420

 

$

19,538

 

Amounts paid

 

 

(90

)

 

(482

)

 

(572

)

 

 

 

 

(42

)

 

(42

)

 

 

(90

)

 

(524

)

 

(614

)

Noncash write-offs

 

 

 

 

88

 

 

88

 

 

 

 

 

(2,374

)

 

(2,374

)

 

 

 

 

(2,286

)

 

(2,286

)

Reserve balance at June 30, 2020

 

$

8,865

 

$

7,195

 

$

16,060

 

 

$

163

 

$

415

 

$

578

 

 

$

9,028

 

$

7,610

 

$

16,638

 

Restructuring charges during the three months ended September 30, 2020 (1)

 

 

 

 

154

 

 

154

 

 

 

17

 

 

353

 

 

370

 

 

 

17

 

 

507

 

 

524

 

Amounts paid

 

 

(6,521

)

 

(436

)

 

(6,957

)

 

 

(180

)

 

(313

)

 

(493

)

 

 

(6,701

)

 

(749

)

 

(7,450

)

Noncash write-offs

 

 

 

 

47

 

 

47

 

 

 

 

 

(129

)

 

(129

)

 

 

 

 

(82

)

 

(82

)

Reserve balance at September 30, 2020

 

$

2,344

 

$

6,960

 

$

9,304

 

 

$

 

$

326

 

$

326

 

 

$

2,344

 

$

7,286

 

$

9,630

 

 

The unpaid and accrued restructuring costs of $9,630 are reflected in accounts payable and accrued expenses on the condensed consolidated balance sheet as of September 30, 2020.  

Income Tax Considerations

The Company has elected to take advantage of certain tax-related benefits available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) signed into U.S. federal law on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss (“NOL”) utilization and carryback periods, modifications to the net interest deduction limitations and a technical correction to the

2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. Per the provisions of the CARES Act, the Company has deferred payment of certain employer payroll taxes for 2020 and has recorded payroll tax credits for expenses related to paying wages and health benefits to employees who were not working as a result of closures and reduced receipts associated with COVID-19.  

An income tax benefit of $(121,145) was recorded for the third quarter of 2020 compared to income tax expense of $14,053 for the third quarter of 2019 on book (loss)/income of $(269,181) and $46,008, respectively. The effective tax rate was approximately 45.0% for the third quarter of 2020 compared to 30.5% for the third quarter of 2019. The Company’s 2020 effective tax rate was positively impacted by provisions in the CARES Act that allow for net operating losses originating in 2018, 2019 or 2020 to be carried back to earlier tax years, many of which had a 35% corporate tax rate.   As a result of the pandemic, Cinemark has incurred significant U.S. losses, which the Company is carrying back to prior years.  The Company recorded an income tax benefit of $(222,398) for the nine months ended September 30, 2020 with regard to U.S. operating losses, tax losses with respect to investments in foreign subsidiaries and a write down of certain intercompany receivables associated with the Company’s foreign subsidiaries.  The Company has recorded an income tax receivable of $84,105 as of September 30, 2020 and received cash tax refunds of $115,769 during the nine months ended September 30, 2020.

If the Company receives certain government disaster relief assistance, it may be subject to certain requirements imposed by the government on the recipients of the aid including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt, incurrence of additional indebtedness and other similar restrictions until the aid is repaid or redeemed in full. However, the Company cannot predict the manner in which such benefits will be allocated or administered and cannot predict whether it will be able to access such benefits in a timely manner or at all.