National CineMedia, Inc. — Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is a holding company whose principal operating subsidiary, NCM LLC, sells cinema, lobby, online and mobile advertising, primarily through its Noovie pre-show. NCM LLC operates under long-term exhibitor services agreements with Regal, Cinemark and AMC, together with agreements covering third-party theater affiliates.
The filing covers the three and nine months ended September 26, 2019, compared with September 27, 2018. The financial statements are unaudited, the business is seasonal, and NCM, Inc. owned 48.6% of NCM LLC at period-end. The remaining economic interests were primarily held by Regal and Cinemark.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $110.5 million | $110.1 million | $297.6 million | $304.0 million |
| Operating income | $40.0 million | $42.3 million | $88.6 million | $93.5 million |
| Net income attributable to NCM, Inc. | $9.2 million | $11.2 million | $17.0 million | $13.5 million |
| Basic EPS | $0.12 | $0.15 | $0.22 | $0.18 |
| Adjusted OIBDA | $51.7 million | $53.6 million | $124.0 million | $129.2 million |
| Adjusted OIBDA margin | 46.8% | 48.7% | 41.7% | 42.5% |
| Theater attendance | 163.4 million | 164.7 million | 497.4 million | 535.8 million |
Q3 revenue was broadly stable as national advertising increased 1.9%, offsetting declines in local, regional and founding-member beverage revenue. Year-to-date revenue declined 2.1%, primarily because of lower attendance and reduced local, regional and beverage revenue.
Q3 operating income declined 5.4% and year-to-date operating income declined 5.2%. Q3 expenses increased 4.0%, driven by selling and marketing costs, administrative costs, theater access fees and a $2.0 million non-cash impairment charge on investments. Year-to-date operating expenses decreased 0.7%, partly reflecting lower administrative costs and the reclassification of ESA-related amortization following adoption of ASC 842.
Interest expense was $13.8 million in Q3 and $42.4 million year to date. Consolidated net income was $22.8 million in Q3 and $41.2 million year to date, with $13.6 million and $24.2 million attributable to noncontrolling interests, respectively. The nine-month effective tax rate was 26.9%, compared with 55.3% in the prior-year period.
Net cash provided by operating activities was $113.6 million year to date, compared with $118.8 million in 2018. Investing activities provided $10.0 million, compared with $20.0 million used in 2018. Financing activities used $118.7 million, including $40.4 million of dividends and $49.4 million of distributions to founding members.
Cash and cash equivalents were $46.3 million at September 26, 2019, and cash, cash equivalents and marketable securities totaled $62.9 million. Revolver availability was $164.2 million, producing reported total liquidity of $227.1 million. A portion of cash and securities held by NCM LLC was not available for NCM, Inc.’s separate obligations.
Total borrowings were $903.3 million before debt issuance costs, consisting principally of $400.0 million of 2022 senior secured notes, $267.3 million of term loans, $230.0 million of 2026 senior unsecured notes and $6.0 million drawn on the revolving facility. Net senior secured leverage was 3.11x and net total leverage was 4.17x, below the applicable covenant thresholds at quarter-end. Approximately 70% of borrowings carried fixed rates.
Material changes versus the prior comparable period
- Q3 revenue increased 0.4%, but year-to-date revenue decreased 2.1% as attendance fell 7.2% year to date.
- National advertising revenue increased despite a 9.0% Q3 decline in national CPMs, supported by higher branded content, lobby promotions and digital advertising.
- National inventory utilization increased to 134.8% in Q3 from 133.2% and to 116.7% year to date from 109.1%, partly because of make-good activity.
- Adjusted OIBDA declined 3.5% in Q3 and 4.0% year to date; margins declined 190 basis points and 80 basis points, respectively.
- Net income attributable to NCM, Inc. declined 17.9% in Q3 but increased 25.9% year to date, primarily because of lower tax expense in 2019.
- NCM adopted ASC 842 in the first quarter of 2019, recording right-of-use assets and lease liabilities for office leases and reclassifying ESA and affiliate intangible amortization as lease expense.
- The company extended its Cinemark and Regal ESAs by four years, to 2041, increasing the weighted-average remaining founding-member ESA term to approximately 20 years.
- The network ended the period with 21,073 screens, down from 21,172 at December 27, 2018, primarily because of the loss of three affiliates.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that available cash, operating cash flow and revolver capacity should be sufficient for working capital, debt service, capital expenditures, TRA payments and expected dividends over the next twelve months, subject to operating performance, seasonality and covenant compliance.
Beginning November 1, 2019, the Cinemark and Regal amendments permit NCM LLC to show up to five minutes of Noovie content after the advertised feature-film showtime and to sell a 30- or 60-second Platinum Spot before attached trailers. These changes are expected by management to increase CPMs, revenue and Adjusted OIBDA, but they also create incremental theater access fees and a 25% revenue share on Platinum Spot revenue, subject to specified minimums.
On October 8, 2019, NCM LLC issued $400.0 million of 5.875% senior secured notes due 2028 and called its $400.0 million of 6.000% notes due 2022 for redemption at 101% of principal plus accrued interest. The redemption date was November 7, 2019.
Key risks include declining theater attendance, changing movie-viewing behavior, advertising demand and CPM volatility, competition from television and digital platforms, reliance on Regal and Cinemark ESAs, substantial leverage, variable-rate debt, restrictions on distributions, related-party arrangements, the tax receivable agreement, technology and cybersecurity failures, and the uncertain benefits and costs of the 2019 ESA amendments.
Unusual items included a $2.0 million investment impairment charge, tax-rate-related changes in the TRA payable, CEO transition costs, the ASC 842 accounting change and the reclassification of integration payments into operating cash flow. The company reported no material litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether post-showtime and Platinum Spot inventory produces sufficient incremental revenue and margin after the additional theater access fees and revenue sharing.
- The sustainability of attendance, advertising CPMs, inventory utilization and the recent shift toward branded content and digital advertising.
- Compliance with debt covenants and the effect of the 2028 refinancing on interest expense, maturities and liquidity.
- The amount and timing of future distributions from NCM LLC, dividends, tax payments and TRA payments.
- The economic impact of the 7.2% year-to-date attendance decline and the continued contraction of the affiliate screen network.
- The carrying value and future amortization of the $658.3 million intangible asset balance and the related contractual access rights.
- The maximum potential $83.6 million of future payments under network affiliate minimum revenue guarantees.
- The consequences of NCM LLC’s substantial noncontrolling interests and the related-party terms with founding members.