National CineMedia, Inc. — Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. operates through National CineMedia, LLC, a cinema advertising business that sells national, local and regional advertising in its Noovie pre-show, theater lobbies and online and mobile channels. The company has long-term exhibitor services agreements with AMC, Regal and Cinemark, with approximately 19 years remaining as of September 28, 2017. The filing covers the unaudited quarter and nine months ended September 28, 2017, compared with September 29, 2016.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $116.4 million | $113.5 million | $285.4 million | $305.1 million |
| Operating income | $50.3 million | $48.4 million | $83.7 million | $100.7 million |
| Consolidated net income | $31.9 million | $21.7 million | $33.3 million | $38.7 million |
| Net income attributable to NCM, Inc. | $9.4 million | $8.2 million | $5.9 million | $10.7 million |
| Diluted EPS | $0.15 | $0.13 | $0.10 | $0.18 |
| Adjusted OIBDA | $62.6 million | $60.9 million | $122.5 million | $144.3 million |
| Adjusted OIBDA margin | 53.8% | 53.7% | 42.9% | 47.3% |
| Theater attendance | 150.6 million | 179.6 million | 492.1 million | 524.1 million |
Q3 operating margin was approximately 43.2%, compared with 42.6% in the prior-year quarter. YTD operating margin was approximately 29.3%, compared with 33.0% in the prior-year period. Q3 revenue increased 2.6%, while YTD revenue declined 6.5%.
- Q3 national advertising revenue increased 2.7% to $84.5 million and local and regional revenue increased 6.3% to $25.2 million. Founding-member beverage revenue declined 10.7% to $6.7 million.
- YTD national advertising revenue declined 9.6% to $194.9 million; local and regional revenue was flat at $67.8 million; beverage revenue increased 4.1% to $22.7 million.
- Q3 total advertising revenue per attendee increased 22.3% to $0.773 despite a 16.1% attendance decline. YTD revenue per attendee was essentially flat at $0.580.
- Operating cash flow was $104.0 million for the first nine months, versus $90.9 million in the prior-year period. Capital expenditures were $7.7 million.
- Cash and cash equivalents were $30.4 million at September 28, 2017. Cash, cash equivalents and marketable securities totaled $49.9 million, of which $47.3 million was held by NCM, Inc. excluding NCM LLC.
- Total liquidity, including $170.2 million of revolver availability, was $220.1 million.
- Total borrowings were $920.0 million, with carrying value of long-term debt of $910.8 million. Debt consisted of $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. The revolver was undrawn.
- The consolidated net senior secured leverage ratio was 3.2 times versus a 6.5-times covenant. Approximately 71% of borrowings carried fixed interest rates.
- Total liabilities exceeded total assets, resulting in consolidated equity/(deficit) of negative $61.9 million. NCM, Inc. stockholders’ deficit was $361.3 million, offset by $299.4 million of noncontrolling interests.
Material changes versus the prior comparable period
- Q3 revenue and operating income improved modestly, but YTD revenue and operating income declined because of lower national advertising demand, lower CPMs and fewer impressions sold.
- YTD national advertising CPMs excluding beverage revenue declined 8.5%, while impressions sold declined 5.3%. National inventory utilization increased slightly to 113.9% from 112.9%.
- Q3 results benefited from the absence of the $10.4 million loss on early retirement of debt recorded in Q3 2016. YTD 2017 also had no comparable debt-retirement loss.
- YTD operating expenses decreased 1.3%, primarily from lower CEO transition costs, former CEO equity-award modification expense and personnel costs, partly offset by higher depreciation and investment impairment expense.
- AMC redeemed 14.6 million NCM LLC units for NCM, Inc. shares during Q3. NCM, Inc.’s reported ownership of NCM LLC increased to 48.8% at September 28, 2017 from 43.7% at December 29, 2016. AMC subsequently redeemed another 1.0 million units on October 20, 2017, increasing NCM, Inc.’s ownership to 49.5%.
- The Carmike-related common unit adjustment resulted in a $201.8 million intangible asset addition, including units issued to AMC and units surrendered for transferred theaters. AMC and Cinemark made $6.1 million of integration and other encumbered-theater payments during the first nine months.
- Shares outstanding increased materially, including 14.6 million shares issued in connection with AMC’s unit redemption. Common shares issued and outstanding were 75.2 million at September 28, 2017, versus 59.9 million at December 29, 2016.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative revenue or earnings guidance. Management expects future liquidity to be supported by NCM LLC operating cash flow, cash on hand and revolver availability.
- Management intends to continue regular quarterly dividends at the Board’s discretion. A $0.22-per-share dividend, approximately $16.8 million, was declared on November 3, 2017 for payment on December 1, 2017.
- Management expects future dividend coverage may be deficient in some periods and may require use of NCM, Inc.’s cash and marketable securities. Dividends are subject to advertising-market conditions, cash needs, debt requirements and Board approval.
- Advertising demand, CPMs and inventory utilization are volatile and affected by economic conditions, advertiser budgets, competition from television, online and mobile platforms, and the timing of upfront and scatter-market commitments.
- Lower theater attendance, reserved seating, online ticketing, longer trailers, alternative movie delivery methods or changes in audience measurement could reduce Noovie viewership, revenue and advertising rates and could increase required makegoods.
- AMC is required under a DOJ-related Final Judgment to reduce its combined ownership of NCM LLC and NCM, Inc. to no more than 15.0% by December 20, 2017, 7.5% by December 20, 2018 and 4.99% by June 20, 2019. The filing reports different AMC ownership figures in separate sections and this should be reconciled.
- Future payments under network affiliate minimum revenue guarantees could total up to $84.3 million over the remaining agreement terms. The company paid $0.1 million under these guarantees during the first nine months.
- The tax receivable agreement liability to founding members totaled $160.1 million, including current and long-term amounts. The company paid $17.3 million under the agreement during the first nine months.
- Unusual items included $3.1 million of investment impairment, a $1.8 million early lease termination expense, $1.7 million of reversed tax contingency reserves and significant non-cash tax and equity effects from the Carmike-related transactions.
- The company expects to adopt the new revenue recognition standard using the modified retrospective method in the first quarter of 2018 and does not expect a material financial statement impact, although barter accounting and disclosures will change.
Important facts for investors to verify
- Reconcile the filing’s inconsistent descriptions of AMC’s ownership percentage at September 28, 2017: the financial statement note states 15.2%, while MD&A states 17.0% before a September 29 sale reduced it to 15.2%.
- Assess the sustainability of dividends given $920.0 million of debt, negative consolidated equity, tax receivable agreement obligations and management’s acknowledgment that cash flow may not always cover dividends.
- Monitor national advertising CPMs, impressions sold, inventory utilization and theater attendance, which drove the YTD revenue decline.
- Review the economic value and amortization profile of the $201.8 million Carmike-related intangible asset and the duration of integration payments.
- Evaluate refinancing and interest-rate exposure, particularly the 2019 term-loan and revolver maturity and variable-rate debt; management estimates a 100-basis-point rate change would affect annual cash interest by approximately $2.7 million on the term loan alone.
- Consider related-party dependence: founding members provide theater access, receive theater access fees and distributions, hold exchangeable NCM LLC units and are owed tax receivable agreement payments.