National CineMedia, Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. is the publicly traded holding company for National CineMedia, LLC, which operates a digital in-theater advertising network across North America. Revenue is generated primarily from national, local and regional cinema advertising, lobby advertising, online and mobile advertising, and beverage-related advertising sold to founding members AMC, Cinemark and Regal.
The filing covers the three and six months ended June 29, 2017, compared with the periods ended June 30, 2016. The business is seasonal, with stronger advertising demand and theater attendance generally occurring in the second through fourth quarters.
- NCM, Inc. owned 39.3% of NCM LLC at June 29, 2017; founding members owned the remaining economic interests.
- The network included 20,623 screens at quarter-end, including 16,716 founding-member screens and 3,907 affiliate screens.
- Approximately 20 years remained on the founding-member exhibition services agreements, and the weighted-average remaining term of the exhibition services and affiliate agreements was 17.4 years based on attendance.
Financial Results and Key Metrics
| Metric | Q2 2017 | Q2 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $97.1 million | $115.4 million | $169.0 million | $191.6 million |
| Operating income | $28.3 million | $46.5 million | $33.4 million | $52.3 million |
| Net income attributable to NCM, Inc. | $1.5 million | $6.8 million | $(3.5) million | $2.5 million |
| EPS, basic and diluted | $0.02 | $0.11 | $(0.06) | $0.04 |
| Adjusted OIBDA | $42.3 million | $59.4 million | $59.9 million | $83.4 million |
| Adjusted OIBDA margin | 43.6% | 51.5% | 35.4% | 43.5% |
| Theater attendance | 160.0 million | 172.2 million | 341.5 million | 344.5 million |
Q2 revenue decreased 15.9%, while year-to-date revenue decreased 11.8%. The decline was concentrated in national advertising, which fell 20.5% in Q2 and 17.1% year to date. Local and regional advertising declined 7.1% in Q2 and 3.4% year to date. Beverage-related revenue increased 7.0% in Q2 and 11.9% year to date.
- Q2 national advertising revenue per attendee declined 14.3% to $0.413, while total advertising revenue per attendee declined 9.4% to $0.607.
- National inventory utilization declined to 112.1% in Q2 from 124.0% and to 93.0% year to date from 102.6%.
- National advertising CPMs excluding beverage revenue declined 11.4% in Q2 and 12.8% year to date, primarily due to lower pricing on upfront commitments and content-partner spending.
- Total operating expenses were essentially flat in Q2 at $68.8 million and declined 2.7% year to date to $135.6 million.
- Operating margin was approximately 29.1% in Q2 and 19.8% year to date, based on reported operating income and revenue.
Cash Flow, Debt and Liquidity
| Metric | June 29, 2017 | December 29, 2016 |
|---|---|---|
| Cash and cash equivalents | $14.6 million | $23.0 million |
| Marketable securities | $37.0 million | $45.7 million |
| Cash, cash equivalents and marketable securities | $51.6 million | $68.7 million |
| Total borrowings | $930.0 million | $935.0 million |
| Debt carrying value, net of issuance costs | $920.3 million | $924.3 million |
| Revolver availability | $160.2 million | $158.8 million |
| Total liquidity | $211.8 million | $227.5 million |
- Six-month operating cash flow was $68.6 million, compared with $45.9 million in the prior-year period, primarily due to improved collections and lower revenue.
- Investing activities provided $4.1 million, including marketable-security activity and $5.8 million of capital expenditures.
- Financing activities used $81.1 million, including $28.7 million of dividends and $44.9 million of distributions to founding members.
- Cash declined $8.4 million during the first six months to $14.6 million.
- Debt consisted of $270.0 million of term loans, $400.0 million of 6.0% senior secured notes due 2022, $250.0 million of 5.75% senior unsecured notes due 2026 and $10.0 million drawn on the revolver.
- Approximately 70% of borrowings carried fixed rates. A 100-basis-point change in variable rates was estimated to affect annual cash interest expense by approximately $2.8 million.
- NCM LLC was in compliance with its debt covenants. Its net senior secured leverage ratio was 3.3x versus a 6.5x covenant.
Material Changes and Unusual Items
- AMC’s acquisition of Carmike resulted in the issuance of approximately 18.4 million NCM LLC units to AMC. AMC also surrendered approximately 4.7 million units for theater transfers and compensation related to lost operating income.
- The related transactions generated a $201.8 million non-cash intangible asset addition and reduced NCM, Inc.’s ownership of NCM LLC from 43.7% at year-end 2016 to 39.3% at quarter-end.
- The reduced ownership increased the portion of consolidated earnings attributable to noncontrolling interests and contributed to the decline in earnings attributable to NCM, Inc.
- Q2 included a $1.8 million non-cash early lease termination charge, reimbursed by the landlord, and $1.7 million of investment impairment expense.
- Year-to-date results included $3.1 million of investment impairment expense and $0.4 million of CEO transition costs, compared with $0.7 million and $3.2 million, respectively, in the prior-year period.
- The company recorded a $35.0 million reduction to deferred tax assets and a $15.8 million deferred tax liability related to the extraordinary Common Unit Adjustment and associated integration payments. These items reduced additional paid-in capital by approximately $50.8 million.
- The filing corrected approximately $3.6 million of out-of-period related-party balance errors through additional paid-in capital and noncontrolling interests.
Outlook, Risks and Contingencies
Management did not provide formal quantitative revenue or earnings guidance in the filing. Management stated that future results will depend on advertising demand, pricing, inventory utilization, theater attendance, the timing of upfront and scatter-market spending, and the growth of online and mobile advertising.
- Management expects continued volatility in CPMs and inventory utilization. Lower scatter-market demand and content-partner spending adversely affected 2017 results.
- Competition from television, online, mobile and other out-of-home video platforms may pressure pricing and demand.
- Changes in movie attendance, release windows, trailer length, reserve seating and alternative movie-delivery methods could reduce pre-show viewership.
- AMC is required under the DOJ Final Judgment to reduce its combined NCM ownership to no more than 15.0% by December 20, 2017, 7.5% by December 20, 2018, and 4.99% by June 20, 2019. Future unit redemptions could increase NCM, Inc.’s share count and dividend requirements.
- Minimum future payments under network-affiliate revenue guarantees could total up to $62.4 million, although no liability was recorded because current revenue-sharing payments exceeded the guarantees.
- The company had no recorded liability for the minimum theater-access-fee provision, which requires aggregate fees to be at least 12% of defined advertising revenue.
- Management believes operating cash flow, cash on hand and revolver availability will fund working capital, debt service, capital expenditures and other requirements for the next twelve months. However, dividend coverage may periodically be below the regular dividend, requiring use of corporate cash and marketable securities.
- On July 14, 2017, NCM LLC acquired Fantasy Movie League for $0.2 million in cash. On August 2, 2017, the company declared a $0.22-per-share dividend, approximately $13.3 million, payable August 31, 2017.
Investor Verification Items
- Verify whether national advertising demand, CPMs and inventory utilization recover after the substantial Q2 and year-to-date declines.
- Assess dividend sustainability against free cash flow after debt service, founding-member distributions and tax receivable agreement payments.
- Monitor leverage, variable-rate exposure and refinancing requirements as debt maturities approach.
- Track AMC’s required ownership divestitures, unit redemptions, dilution and their effects on NCM, Inc.’s dividend obligations.
- Review the valuation and useful-life assumptions supporting the $744.5 million of net intangible assets at quarter-end.
- Evaluate the impact of the investment impairments, early lease termination charge and tax-basis adjustments on recurring earnings.
- Consider the $62.4 million maximum exposure under network-affiliate minimum revenue guarantees and the company’s seasonal cash-flow pattern.