National CineMedia, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. consolidates National CineMedia, LLC, which operates a North American digital in-theatre advertising network. Revenue is generated primarily through long-term exhibitor services agreements with AMC, Regal and Cinemark and agreements with third-party theatre affiliates. The filing covers the quarter and nine months ended October 1, 2015, compared with September 25, 2014. Results are unaudited and the business is seasonal.
As of October 1, 2015, NCM, Inc. owned 45.2% of NCM LLC; the founding members owned the remaining 54.8%. The founding members’ exchangeable NCM LLC units are excluded from diluted EPS because they were antidilutive.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $111.7 million | $100.8 million | $310.1 million | $270.9 million |
| Operating income | $47.8 million | $40.7 million | $86.5 million | $93.8 million |
| Consolidated net income | $26.9 million | $19.4 million | $30.0 million | $32.7 million |
| Net income attributable to NCM, Inc. | $7.7 million | $4.8 million | $8.8 million | $5.3 million |
| Diluted EPS | $0.13 | $0.08 | $0.15 | $0.09 |
| Adjusted OIBDA | $59.6 million | $52.2 million | $154.7 million | $126.8 million |
| Adjusted OIBDA margin | 53.4% | 51.8% | 49.9% | 46.8% |
| Operating cash flow | Not separately provided | Not separately provided | $61.9 million | $86.9 million |
Q3 revenue increased 10.8%, while nine-month revenue increased 14.5%. Q3 operating margin was approximately 42.8%, compared with 40.4% in the prior-year quarter; the nine-month operating margin was approximately 27.9%, compared with 34.6%, primarily reflecting Screenvision merger-related costs. Net income attributable to NCM, Inc. increased 60.4% in Q3 and 66.0% for the nine-month period.
- Q3 national advertising revenue increased 26.9% to $79.8 million; local advertising revenue declined 11.8% to $25.5 million.
- Q3 founding-member beverage advertising revenue declined 28.9% to $6.4 million, partly because one founding member reduced its advertising unit from 60 seconds to 30 seconds.
- Total theatre attendance increased 0.4% in Q3 and 2.4% for the nine-month period.
- Q3 national advertising revenue per attendee increased 26.2% to $0.486; total advertising revenue per attendee increased 10.4% to $0.681.
- National inventory utilization increased to 145.8% in Q3 from 125.3% in the prior-year quarter and to 127.0% for the nine-month period from 107.3%.
- Q3 Adjusted OIBDA increased 14.2%; the nine-month increase was 22.0%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $22.7 million at October 1, 2015, compared with $13.4 million at January 1, 2015.
- Cash, cash equivalents and marketable securities totaled $80.5 million, excluding cash held by NCM LLC that was unavailable for NCM, Inc. obligations.
- Total liquidity, including $69.0 million of revolver availability, was $149.5 million, down from $193.6 million at year-end 2014.
- Nine-month operating cash flow was $61.9 million; investing cash flow was negative $1.1 million and financing cash flow was negative $51.5 million.
- Long-term debt was $936.0 million, consisting of $66.0 million drawn on the revolver, $270.0 million of term loans, $200.0 million of senior unsecured notes and $400.0 million of senior secured notes.
- The company reported compliance with debt covenants. Net senior secured leverage was 3.2 times versus a 6.5-times covenant limit.
- Approximately 64% of borrowings carried fixed rates. A 100-basis-point interest-rate change was estimated to affect annual cash interest expense by approximately $3.4 million.
- NCM LLC paid $39.4 million of dividends during the first nine months, distributed $58.0 million to founding members and borrowed $166.0 million while repaying $122.0 million.
Material changes versus the prior comparable period
- National advertising growth and higher CPMs more than offset declines in local and founding-member beverage revenue.
- Operating expenses rose 6.3% in Q3 and 26.3% for the nine-month period. Excluding merger-related costs, nine-month operating expenses increased 9.2%.
- Screenvision merger termination costs were $34.3 million for the first nine months of 2015, including an approximately $26.8 million termination payment and approximately $7.5 million of related professional fees. No such costs were incurred in Q3 2015.
- Amortization of terminated derivatives declined to $1.6 million for the first nine months from $7.6 million, as the amortization period ended in February 2015.
- NCM, Inc.’s ownership of NCM LLC declined to 45.2% from 45.8% at January 1, 2015, primarily because of annual common-unit adjustments issued to founding members. This increased the portion of earnings attributable to noncontrolling interests.
- Dividends declared were $0.22 per share in Q3 and $0.66 per share for the first nine months, compared with $1.16 per share in the prior-year period, which included a $0.50 special dividend.
Guidance, outlook, risks and unusual items
- Management expected 2015 capital expenditures of $13.0 million to $15.0 million, primarily for management, content distribution, inventory, audience-targeting and network systems.
- Management expected national advertising commitments entering 2016 to represent approximately 70% to 75% of its 2016 national advertising revenue target. Commitments for October 2015 through December 2016 were approximately 13% above the comparable prior-year five-quarter period.
- Management expected a further approximately $1.3 million negative impact on Q4 2015 beverage revenue from the reduced advertising unit, with most of the time expected to be resold to other national advertisers.
- Seven new affiliate circuits representing 406 screens were added during 2014 and 2015; one affiliate with 142 screens and approximately seven million annual attendees was expected to join the network in January 2016.
- Management believed operating cash flow and cash on hand would fund working capital, debt service, capital expenditures and other requirements for the next twelve months. Future dividends remain subject to Board approval and available cash.
- A $25.5 million negative NCM LLC available-cash distribution calculation related to merger costs will be netted against distributions for the second quarter of 2016, payable in the third quarter of 2016.
- Minimum revenue guarantees to network affiliates could require future payments of up to $37.5 million over the remaining contract terms; only an inconsequential liability was recorded.
- Key risks include advertising-market volatility, competition from television, online and mobile video platforms, seasonality, changing theatre attendance, customer cancellations, variable-rate debt, related-party arrangements and dependence on founding-member theatre access agreements.
- On November 6, 2015, the company declared a $0.22-per-share dividend, approximately $13.0 million, payable December 4, 2015.
Important facts for investors to verify
- Reconcile the significant improvement in national advertising revenue, CPMs and inventory utilization with the sustainability of pricing and upfront commitments.
- Assess the effect of local advertising weakness and the founding-member beverage reduction on future revenue mix.
- Review debt maturities, variable-rate exposure, covenant headroom and the decline in revolver availability.
- Evaluate dividend coverage, including the timing of NCM LLC distributions and tax receivable agreement payments.
- Consider the impact of NCM, Inc.’s declining ownership percentage on future earnings attributable to public shareholders.
- Review related-party theatre access fees, mandatory distributions and tax receivable agreement obligations.
- Confirm that the Screenvision termination costs are nonrecurring and that no additional material merger expenses are expected.