National CineMedia, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. operates through NCM LLC, a digital cinema advertising network serving founding-member and affiliate theaters. Revenue is generated principally from national, local and regional advertising, founding-member beverage advertising, lobby promotions, and online/mobile advertising. The unaudited quarter ended March 29, 2018 is compared with the quarter ended March 30, 2017. The business is seasonal, with typically lower first-quarter revenue and attendance.
- Approximately 19 years remained on the founding-member exhibitor services agreements.
- NCM, Inc. owned 48.8% of NCM LLC at quarter-end; founding members owned the remaining exchangeable units.
- Network attendance was 177.0 million, down 2.5% year over year, while the network included 20,802 screens.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $80.2 million | $71.9 million | Up 11.5% |
| Operating income | $11.0 million | $5.1 million | Up 115.7% |
| Consolidated net loss | $3.5 million | $5.8 million | Improved |
| Net loss attributable to NCM, Inc. | $1.9 million | $1.3 million | Increased |
| Basic and diluted loss per share | $0.03 loss | $0.02 loss | Greater loss |
| Adjusted OIBDA | $23.3 million | $17.6 million | Up 32.4% |
| Adjusted OIBDA margin | 29.1% | 24.5% | Up 4.6 percentage points |
| Operating cash flow | $49.5 million | $57.0 million | Down $7.5 million |
National advertising revenue increased 23.4% to $54.8 million, driven by a 21.8% increase in impressions sold, a 2.3% increase in national CPMs excluding beverage revenue, and higher scatter-market demand. National inventory utilization increased to 95.2% from 76.2%. Local and regional revenue declined 8.9% to $17.4 million, and founding-member beverage revenue declined 4.8% to $8.0 million.
Total operating expenses rose 3.6% to $69.2 million. Advertising operating costs and administrative costs increased, while network costs and selling and marketing costs declined. Interest expense increased to $13.8 million from $13.2 million. Income tax expense was $1.0 million compared with a $1.8 million benefit in the prior-year quarter, producing an 88.6% effective tax rate. Management attributed the higher tax rate primarily to tax effects associated with restricted-stock vesting.
Cash, cash equivalents and marketable securities totaled $81.2 million at March 29, 2018, including $78.1 million excluding amounts held by NCM LLC that were unavailable for NCM, Inc. obligations. Revolver availability was $137.2 million, resulting in reported total liquidity of $218.4 million. Cash used in investing activities was $9.4 million, and cash used in financing activities was $24.3 million, including $15.0 million of dividends and $37.6 million of distributions to founding members.
Debt, capital structure and material changes
- Total borrowings were $953.0 million, consisting of a $33.0 million revolver balance, $270.0 million of term loans, $400.0 million of 6.0% senior secured notes due 2022, and $250.0 million of 5.75% senior unsecured notes due 2026. Carrying value of long-term debt was $944.8 million.
- NCM LLC’s net senior secured leverage ratio was 3.1x versus a 6.5x covenant, and the company was in compliance with its debt covenants.
- Approximately 68% of borrowings carried fixed rates; a 100-basis-point change in relevant variable rates would affect annual cash interest expense by approximately $3.0 million.
- NCM LLC issued 2.8 million net common membership units to founding members for theater access rights and recorded a $15.9 million intangible asset. NCM, Inc.’s ownership declined from 49.5% to 48.8%.
- Integration and other encumbered-theater payments received from founding members were $9.4 million, compared with $1.0 million in the prior-year quarter.
- The company adopted revenue standard ASU 2014-09, recording a $0.2 million cumulative-effect adjustment. It also changed the tax receivable agreement payable to an undiscounted presentation and recast prior periods; management stated the change reduced Q1 2018 net loss by $2.1 million and loss per share by $0.03.
Outlook, risks and unusual items
Management stated that NCM LLC’s operating cash flow, cash on hand and revolver availability should fund working capital, debt service, capital expenditures and other requirements for the next twelve months. A $0.17 per-share dividend, approximately $13.1 million, was declared on May 3, 2018 for payment June 1, 2018. Future dividends remain subject to Board discretion and business, liquidity and covenant considerations.
- Advertising spending is cyclical and may be affected by macroeconomic conditions, client budgets, competition from online, mobile, television and other video platforms, and changes in CPMs or inventory utilization.
- Lower theater attendance, reserved seating, online ticketing, longer trailers, shorter theatrical release windows and alternative movie-delivery methods could reduce pre-show viewership and increase make-good obligations.
- Local and regional revenue declined following a sales-department realignment and account reassignment; management indicated that the transition contributed to lower contract volume.
- Minimum future payments under network-affiliate revenue guarantees could reach $77.8 million over the remaining contract terms, although no payments were made in the quarter.
- The company had a material weakness in internal control over financial reporting related to income-tax accounting and deferred tax accounts associated with the tax receivable agreement. Controls were enhanced during the quarter, but management had not yet considered the weakness remediated.
- AMC was required to reduce its combined NCM equity interests to no more than 7.5% by December 20, 2018 and 4.99% by June 20, 2019; AMC owned 14.3% as of March 29, 2018.
Important facts for investors to verify
- Whether national advertising demand, CPMs and approximately 95% inventory utilization were sustained in subsequent quarters.
- The effect of declining attendance and local/regional advertising weakness on full-year revenue and margins.
- Progress in remediating the tax-accounting material weakness and any further restatements or tax-related adjustments.
- Ability to fund dividends, tax receivable agreement payments, founding-member distributions and debt service from available cash flow.
- Debt refinancing requirements as the 2019 revolver and term-loan maturities approach, including exposure to variable interest rates.
- Impact of founding-member ownership changes, AMC’s required divestitures and future NCM LLC common-unit adjustments on ownership, distributions and share count.