National CineMedia, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that consolidates National CineMedia, LLC, a cinema advertising network serving national, regional and local advertisers through on-screen, lobby, online and mobile advertising products. The report covers the quarter and six months ended June 27, 2019, compared with June 28, 2018. The business is seasonal, with advertising revenue and theater attendance generally higher in the second through fourth quarters.
- NCM LLC had approximately 18 years remaining on its founding-member exhibitor services agreements and a 15.5-year weighted-average remaining term for founding-member and network-affiliate agreements.
- The network had 21,045 screens at June 27, 2019, including 16,849 founding-member screens and 4,196 affiliate screens.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $110.2 million | $113.7 million | $187.1 million | $193.9 million |
| Operating income | $37.7 million | $40.2 million | $48.6 million | $51.2 million |
| Net income attributable to NCM, Inc. | $8.9 million | $4.2 million | $7.8 million | $2.3 million |
| Diluted EPS | $0.11 | $0.05 | $0.10 | $0.03 |
| Adjusted OIBDA | $50.2 million | $52.3 million | $72.3 million | $75.6 million |
| Adjusted OIBDA margin | 45.6% | 46.0% | 38.6% | 39.0% |
| Theater attendance | 185.3 million | 194.1 million | 334.0 million | 371.1 million |
- Q2 revenue declined 3.1%; year-to-date revenue declined 3.5%. National revenue decreased 1.5% in both periods, while regional revenue decreased 18.3% in Q2 and 16.5% year to date.
- Operating expenses decreased 1.4% in Q2 and 2.9% year to date, but operating income declined 6.2% and 5.1%, respectively.
- Net income attributable to NCM, Inc. increased primarily because income tax expense fell to $2.3 million in Q2 and $1.7 million year to date, versus $16.0 million and $17.0 million, respectively, in the prior-year periods.
- Cash provided by operating activities was $59.3 million for the first six months, compared with $66.2 million in the prior-year period. Investing activities provided $10.6 million, while financing activities used $68.5 million.
- Cash and cash equivalents were $42.8 million at June 27, 2019, compared with $41.4 million at December 27, 2018. Cash, cash equivalents and marketable securities totaled $61.7 million; management reported total liquidity of $204.9 million, including $143.2 million of revolver availability.
- Gross borrowings were $925.0 million and debt net of issuance costs was $918.1 million. The debt consisted primarily of $400.0 million of 6.0% senior secured notes due 2022, $268.0 million of term loans, $27.0 million drawn on the revolver and $230.0 million of 5.75% senior unsecured notes due 2026.
- Consolidated net senior secured leverage was 3.14 times and consolidated net total leverage was 4.24 times, below stated covenant levels of 4.50 times and 6.25 times, respectively.
- Total equity was negative $110.5 million at June 27, 2019, including NCM, Inc. stockholders’ deficit of $383.7 million and noncontrolling interests of $273.2 million.
Material changes versus the prior comparable period
- Attendance fell 4.5% in Q2 and 10.0% year to date, reflecting a weaker movie slate. Revenue per attendee nevertheless increased 1.5% in Q2 and 7.1% year to date.
- Q2 national advertising revenue was pressured by a 10.4% decline in national CPMs, partly offset by higher impressions sold and utilization. Six-month national CPMs declined 2.2% and impressions sold declined 1.4%.
- Local revenue declined due to fewer contracts and sales-force realignment; regional revenue also declined, partly reflecting automotive spending shifting from regional to national advertising.
- Administrative and selling costs declined due to lower personnel, legal and professional expenses, including the absence of prior-year CEO expenses and costs related to a 2018 shareholder settlement.
- The adoption of ASC 842 in 2019 reclassified ESA and affiliate intangible amortization as “amortization of intangibles recorded for network theater screen leases.” It also reclassified certain founding-member integration payments from financing to operating cash flows, affecting year-over-year cash-flow comparisons.
- Non-operating expense increased to $14.4 million in Q2 and $28.5 million year to date, primarily due to unfavorable remeasurement of the tax receivable agreement payable. The prior-year periods included a debt-extinguishment loss and a favorable tax receivable agreement remeasurement.
Outlook, risks, contingencies and unusual items
- Management stated that operating cash flows, cash on hand and revolver availability should be sufficient for working capital, debt service, capital expenditures and other obligations over the next twelve months. No formal revenue or earnings guidance was provided.
- Management intends to pay regular quarterly dividends for the foreseeable future at the discretion of the Board. A $0.17-per-share dividend, approximately $13.1 million, was declared on August 5, 2019 for payment August 30, 2019.
- Revenue is exposed to advertising demand, CPM pricing, inventory utilization, economic cycles, theater attendance, the film release slate and competition from television, digital and other video platforms.
- Founding-member theater access fees include annual 5% increases for digital-screen and equipment components, and the per-attendee component is scheduled to increase 8% in 2022.
- Network-affiliate agreements include minimum revenue guarantees with a maximum potential future payment obligation of $90.1 million over remaining contract terms; $0.7 million was accrued at June 27, 2019.
- The company had $5.7 million of make-good provisions for undelivered advertising impressions and $47.7 million of unsatisfied performance obligations expected to be recognized in 2019.
- Approximately 32% of borrowings were variable-rate debt. Management estimated that a 100-basis-point change in applicable rates would change annual cash interest expense by approximately $3.0 million.
- Thomas F. Lesinski became CEO effective August 2, 2019. Following his appointment, the company temporarily failed Nasdaq requirements for board independence and a three-member independent audit committee. Nasdaq granted a cure period ending at the earlier of the next annual meeting or August 2, 2020, subject to applicable timing rules; Cinemark notified the company that it would designate a replacement independent director.
- The company reported no material changes to previously disclosed risk factors and stated that ordinary-course legal proceedings were not expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether advertising demand, CPMs, inventory utilization and attendance improve following the weaker first-half movie slate.
- The sustainability of dividends given high leverage, tax receivable agreement payments, mandatory founding-member distributions and negative consolidated equity.
- Refinancing requirements for the 2022 senior secured notes: the revolving facility and term loan have earlier maturity consequences if the notes are not refinanced by October 30, 2021.
- Compliance with Nasdaq board and audit committee independence requirements and the timing of the replacement director appointment.
- The effect of variable interest rates, affiliate minimum guarantees, make-good obligations and related-party theater access agreements on future cash flow.
- The extent to which the substantial increase in reported net income reflects lower tax expense and prior-year unusual items rather than improvement in core operating performance.