Business Context and Reporting Period
National CineMedia, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 26, 2014, with comparative periods ended June 27, 2013. The company operates North America’s largest digital in-theatre advertising network through NCM LLC, primarily under long-term exhibitor services agreements with AMC, Regal and Cinemark and agreements with third-party network affiliates. Fathom Events was sold on December 26, 2013, leaving advertising as the company’s sole reportable business segment.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $99.9 million | $122.8 million | $170.1 million | $205.0 million |
| Advertising revenue | $99.9 million | $116.9 million | $170.1 million | $190.6 million |
| Operating income | $40.3 million | $58.0 million | $53.1 million | $79.6 million |
| Consolidated net income | $17.9 million | $32.0 million | $13.3 million | $33.9 million |
| Net income attributable to NCM, Inc. | $3.6 million | $9.5 million | $0.5 million | $8.5 million |
| Diluted earnings per share | $0.06 | $0.17 | $0.01 | $0.15 |
| Adjusted OIBDA | $52.0 million | $66.2 million | $74.6 million | $95.3 million |
| Adjusted OIBDA margin | 52.1% | 53.9% | 43.9% | 46.5% |
| Operating cash flow | Not separately provided | Not separately provided | $36.6 million | $43.9 million |
Q2 operating margin was approximately 40.3%, compared with approximately 47.2% in the prior-year quarter. Six-month operating margin was approximately 31.2%, compared with approximately 38.8% in the prior-year period.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $13.4 million at June 26, 2014, compared with $54.7 million at December 26, 2013.
- Marketable securities totaled $60.3 million, comprising $38.7 million of short-term securities and $21.6 million of long-term securities. Total cash, cash equivalents and marketable securities were $73.7 million.
- Total debt was $899.0 million, including $29.0 million drawn on the revolving facility, $270.0 million of term loans, $200.0 million of senior unsecured notes and $400.0 million of senior secured notes. Long-term debt, net of the current portion, was $885.0 million.
- Revolving credit availability was $120.0 million at June 26, 2014. The total facility capacity was $149.0 million, of which $14.0 million was scheduled to mature on December 31, 2014 before subsequent amendments.
- NCM LLC was in compliance with debt covenants. Its consolidated net senior secured leverage ratio was 3.3 times versus a 6.5-times covenant limit.
- Total liabilities exceeded assets, resulting in total equity attributable to the consolidated company of negative $188.3 million. NCM, Inc. stockholders’ deficit was $399.2 million, while noncontrolling interests were $210.9 million.
Material Changes Versus the Prior Comparable Period
- Q2 revenue declined 18.6% to $99.9 million; six-month revenue declined 17.0% to $170.1 million.
- Advertising revenue declined 14.5% in Q2 and 10.8% year to date. National advertising revenue fell 18.0% in Q2 and 17.6% year to date, primarily because national CPMs declined 21.8% in Q2 and 17.6% year to date.
- Q2 theatre attendance decreased 6.3% to 175.4 million, while six-month attendance was essentially flat at 341.9 million. National inventory utilization increased to 122.9% in Q2 from 107.1%.
- Local advertising revenue decreased 3.1% in Q2 but increased 11.5% year to date, supported by higher contract volume and larger regional contracts.
- Fathom Events contributed no revenue or operating costs in 2014, versus $5.9 million of revenue and $4.2 million of operating costs in Q2 2013 and $14.4 million of revenue and $10.0 million of operating costs in the first six months of 2013.
- Operating income fell 30.5% in Q2 and 33.3% year to date. Adjusted OIBDA declined 21.5% in Q2 and 21.7% year to date, while margins decreased by 1.8 and 2.6 percentage points, respectively.
- Depreciation and amortization increased 25.8% in Q2 and 34.5% year to date because of higher amortization of affiliate and founding-member-related intangible assets.
- Merger-related administrative costs were $1.7 million in both the quarter and six-month period, compared with none in the prior-year periods.
- Operating cash flow decreased $7.3 million to $36.6 million, primarily because of lower net income and higher tax receivable agreement payments, partly offset by favorable receivables and deferred-revenue timing.
- Financing cash usage increased to $83.3 million from $45.6 million, driven by higher dividends, including a $0.50-per-share special dividend paid in the first quarter, and higher distributions to founding members.
Outlook, Risks, Contingencies and Unusual Items
- Management expects national CPM pressure to continue through the remainder of 2014 because of client-mix changes, aggressive pricing, a soft television scatter market and competition from online and mobile video platforms.
- Management expects future network additions to expand salable impressions and geographic coverage. Ten new affiliate circuits added during 2013 and early 2014 were expected to add approximately 10 million annual attendees and approximately 137 million salable national impressions on a full-year pro forma basis.
- The proposed Screenvision merger has a stated transaction value of $375 million, consisting of $225 million in cash and $150 million in NCM, Inc. stock. The Department of Justice issued a second request for information, extending the antitrust review period. Closing remained subject to regulatory approval and other conditions.
- NCM, Inc. obtained a commitment for a $250 million term loan to fund the cash consideration and related fees. The company also amended NCM LLC’s credit facility to permit a potential contribution of Screenvision assets and related debt to NCM LLC.
- If the Screenvision transaction fails for specified reasons, NCM, Inc. may owe an approximately $28.8 million termination fee. No liability was recorded because management did not believe payment was probable.
- On July 2, 2014, the maturity of $135 million of revolving credit capacity was extended to November 26, 2019; the remaining $14 million remained due December 31, 2014. On July 30, 2014, the company declared a $0.22-per-share dividend, approximately $12.9 million, payable September 5, 2014.
- Minimum revenue guarantees to network affiliates could require future payments of up to $37.2 million over the remaining agreement terms; no liability was recorded because expected revenue-sharing payments exceeded the guarantees.
- Approximately 67% of borrowings carried fixed rates and 33% carried variable rates. A 100-basis-point change in applicable rates was estimated to change annual cash interest expense by approximately $3.0 million.
- The filing states that the business is seasonal, with advertising expenditures and theatre attendance generally higher in the second, third and fourth fiscal quarters.
Most Important Facts to Verify
- Whether the Screenvision merger received antitrust clearance, closed, was terminated or required payment of the potential $28.8 million fee.
- Whether national advertising CPM declines stabilized or continued, and whether increased inventory utilization translated into improved revenue.
- The company’s post-quarter debt balance, borrowing costs, covenant headroom and the maturity or refinancing of the $14 million revolving-credit tranche.
- Cash available at NCM, Inc. versus cash held at NCM LLC, particularly given dividends, tax receivable agreement payments and mandatory distributions to founding members.
- The effect of the Fathom Events sale and Screenvision transaction on comparable revenue, margins, ownership percentages and noncontrolling interests.
- The sustainability of dividend payments in light of negative consolidated equity, high leverage and declining attributable earnings.