National CineMedia, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. operates through National CineMedia, LLC, a cinema advertising network serving founding-member theaters operated by AMC, Cinemark and Regal, as well as network affiliates. Revenue is generated primarily from national, local and regional advertising, founding-member beverage advertising, lobby promotions, and online and mobile products.
The filing covers the three months ended March 30, 2017, compared with the three months ended March 31, 2016. The business is seasonal, with generally higher advertising revenue and theater attendance in the second through fourth quarters. Long-term exhibitor services agreements had approximately 20 years remaining, and the weighted-average remaining term of exhibitor and network-affiliate agreements was 17.6 years at quarter-end.
Financial Performance and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $71.9 million | $76.2 million | Down 5.6% |
| Operating income | $5.1 million | $5.8 million | Down 12.1% |
| Consolidated net loss | $9.5 million | $8.5 million | Loss increased $1.0 million |
| Net loss attributable to NCM, Inc. | $5.0 million | $4.3 million | Loss increased $0.7 million |
| Basic and diluted loss per share | $0.08 loss | $0.07 loss | Loss increased $0.01 |
| Adjusted OIBDA | $17.6 million | $24.0 million | Down 26.7% |
| Adjusted OIBDA margin | 24.5% | 31.5% | Down 7.0 percentage points |
| Theater attendance | 181.5 million | 172.3 million | Up 5.3% |
National advertising revenue declined $5.8 million, or 11.6%, primarily because national advertising CPMs decreased 13.7% and impressions sold decreased 1.3%. National inventory utilization declined from 81.3% to 76.2%. Local and regional advertising revenue increased 1.6% to $19.1 million, while founding-member beverage advertising revenue increased 16.7% to $8.4 million.
Total operating expenses decreased 5.1% to $66.8 million. Administrative costs declined because the prior-year period included CEO transition costs and expense related to modifying the former CEO’s equity awards. These savings were partly offset by higher theater access fees, depreciation and amortization, and a $1.4 million impairment charge on an investment.
Cash provided by operating activities was $57.0 million, compared with $23.7 million in the prior-year period. The increase primarily reflected timing of tax receivable agreement payments and stronger collections of receivables. Investing cash flow was negative $6.7 million, including $2.9 million of capital expenditures. Financing cash flow was negative $43.1 million, including $15.3 million of dividends and $39.9 million of distributions to founding members, partly offset by net borrowings.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $30.2 million at March 30, 2017, compared with $23.0 million at December 29, 2016.
- Cash, cash equivalents and marketable securities totaled $80.9 million. Excluding NCM LLC, NCM, Inc. reported cash and marketable securities of $74.1 million.
- Total borrowings were $950.0 million, with a carrying value of long-term debt of $939.8 million after debt issuance costs.
- Debt consisted of $30.0 million drawn on the revolving facility, $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.
- Revolver availability was $143.8 million, resulting in reported total liquidity of $224.7 million.
- NCM LLC’s net senior secured leverage ratio was 3.1 times, below the 6.5-times covenant. The company stated that it was in compliance with applicable debt covenants.
- Approximately 68% of borrowings carried fixed interest rates. Management estimated that a 100-basis-point change in variable rates would change annual cash interest expense by approximately $3.0 million.
Material Changes and Unusual Items
- In connection with AMC’s acquisition of Carmike and a Department of Justice final judgment, NCM LLC issued approximately 18.4 million membership units to AMC and received the surrender of approximately 4.7 million units related to theater transfers and compensation for lost operating income. The transactions produced a $201.8 million net intangible asset.
- NCM, Inc.’s ownership of NCM LLC decreased to 39.3% from 43.7% at December 29, 2016, increasing the portion of consolidated loss attributable to noncontrolling interests.
- AMC transferred advertising rights for 17 theaters, representing 318 screens, to another provider. The theaters are expected to revert to NCM after the 10-year final-judgment period. AMC will make integration payments until the theaters return to NCM’s network or the applicable exhibitor services agreement expires.
- AMC must 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, subject to the terms of the company’s memorandum of understanding with AMC.
- The company recorded a $1.4 million other-than-temporary impairment on an investment and recognized tax-related reductions of approximately $50.8 million in additional paid-in capital associated with the extraordinary common-unit adjustment.
Outlook, Commentary, Risks and Contingencies
The filing does not provide quantitative revenue or earnings guidance. Management expects future liquidity to be supported by NCM LLC operating cash flow, cash balances, quarterly distributions and revolver availability. Management stated that available resources should fund working capital, debt service, capital expenditures and other requirements for at least the next twelve months.
Management identified continued volatility in national advertising CPMs and inventory utilization, weaker scatter-market demand, competition from online, mobile, television and other video platforms, and dependence on advertising budgets as key uncertainties. Additional risks include declining movie attendance, longer trailers, reserve seating, shortened release windows, alternative movie-delivery methods, macroeconomic conditions and advertiser concentration by industry.
The company’s minimum future network-affiliate revenue guarantees totaled up to $60.3 million over the remaining contract terms, although no liability was recorded because expected revenue-share payments exceeded the guarantees. Theater access fees to founding members increased in 2017 under contractual escalators and cannot be less than 12% of defined aggregate advertising revenue; no additional minimum-payment liability was recorded.
A quarterly dividend of $0.22 per common share was declared on April 28, 2017, totaling approximately $13.3 million and payable June 1, 2017. Future dividends remain subject to board discretion, operating performance, liquidity, debt requirements and other factors.
Management stated that disclosure controls were effective as of March 30, 2017, with no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors and no pending legal matters expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the decline in national CPMs, inventory utilization and scatter-market demand persists beyond the first quarter.
- The effect of AMC’s required ownership divestitures, theater transfers, unit redemptions and future common-unit adjustments on NCM, Inc.’s ownership percentage and earnings attributable to its shareholders.
- Coverage of the $0.22 quarterly dividend after debt service, tax receivable agreement payments, founding-member distributions and capital expenditures.
- Compliance with debt covenants and the availability of the $143.8 million revolver, particularly if Adjusted OIBDA declines further.
- Timing and amount of tax receivable agreement payments; the 2017 payment was expected in the second quarter and had not yet been made at quarter-end.
- Execution of integration payments and the eventual return or permanent loss of advertising rights for theaters affected by the DOJ final judgment.
- Potential exposure under the $60.3 million of network-affiliate minimum revenue guarantees and the impact of contractual theater access-fee escalators.