National CineMedia, Inc. — Q1 2014 Form 10-Q Summary
Reporting period: Three months ended March 27, 2014, compared with the three months ended March 28, 2013. The filing was signed May 6, 2014. National CineMedia operates a large North American digital in-theatre advertising network through NCM LLC, primarily under long-term exhibitor services agreements with AMC, Regal and Cinemark. Fathom Events was sold on December 26, 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $70.2 million | $82.2 million | Down 14.6% |
| Advertising revenue | $70.2 million | $73.7 million | Down 4.7% |
| Operating expenses | $57.4 million | $60.6 million | Down 5.3% |
| Operating income | $12.8 million | $21.6 million | Down 40.7% |
| Operating margin | 18.2% | 26.3% | Down 8.1 percentage points |
| Net loss attributable to NCM, Inc. | $(3.1) million | $(1.0) million | Loss increased |
| Loss per share | $(0.05) | $(0.02) | Higher loss |
| Adjusted OIBDA | $22.6 million | $29.1 million | Down 22.4% |
| Adjusted OIBDA margin | 32.2% | 35.4% | Down 3.2 percentage points |
| Operating cash flow | $11.9 million | $28.6 million | Down $16.7 million |
National advertising revenue declined $8.8 million, or 17.1%, primarily because national inventory utilization fell from 86.0% to 72.6% and national advertising CPMs declined. Local advertising revenue increased $4.8 million, or 36.1%, while founding-member beverage revenue increased $0.5 million, or 5.6%.
Theatre attendance increased 7.7% to 166.5 million, but total advertising revenue per attendee declined 11.5% to $0.422. Total revenue and operating income were also affected by the absence of Fathom Events revenue, which contributed $8.5 million in Q1 2013.
Cash and cash equivalents were $16.6 million at March 27, 2014, compared with $54.7 million at December 26, 2013. Cash, cash equivalents and marketable securities totaled $78.8 million, and revolver availability was $87.0 million, for stated total liquidity of $165.8 million. Cash declined primarily because of $42.3 million of dividends, $31.0 million of distributions to founding members, and $25.1 million paid under the tax receivable agreement.
Total debt was $907.0 million, including $37.0 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 and a 3.1x consolidated net senior secured leverage ratio versus a 6.5x covenant limit. Approximately 66% of borrowings carried fixed rates. A 100-basis-point rate change would affect annual cash interest expense by approximately $3.1 million.
Material changes versus the prior comparable period
- Revenue decreased 14.6%, while operating expenses decreased only 5.3%, reducing operating margin.
- National advertising weakened because of lower utilization, lower CPMs, pricing pressure and increased competition from online and mobile video platforms.
- Local advertising grew substantially through higher contract volume and larger contracts.
- Fathom Events revenue and related operating costs were eliminated following the December 2013 sale.
- Depreciation and amortization increased 44.4% to $7.8 million, primarily from amortization of new affiliate agreements and founding-member theatre-related intangible assets.
- Operating cash flow fell mainly because tax receivable agreement payments increased by $15.0 million, including payments related to prior-year operating loss carrybacks.
- NCM, Inc.’s ownership of NCM LLC declined to 45.8% from 46.1%, primarily because NCM LLC issued 1,087,911 membership units to founding members for theatre additions.
- The company declared a $0.72-per-share dividend during the quarter, consisting of a regular $0.22 dividend and a special $0.50 dividend.
Outlook, commentary, risks and unusual items
- Management expects continued pressure on national advertising CPMs during 2014 as client mix changes and competition from online and mobile video platforms increases.
- The business is seasonal; management indicated that the first quarter typically produces lower revenue than the second, third and fourth quarters.
- Management believes NCM LLC’s operating cash flow, cash on hand and revolver availability should fund working capital, debt service, capital expenditures and other requirements for the next twelve months.
- Network expansion, including seven new affiliate circuits added during 2013 and early 2014, is expected to add approximately 8 million annual attendees and approximately 118 million salable national advertising impressions on a full-year pro forma basis.
- Minimum revenue guarantees to network affiliates could require future payments of up to $40.9 million; no liability was recorded because expected revenue-sharing payments exceeded the guarantees.
- Approximately $9.1 million related to discontinued interest-rate hedges remained in accumulated other comprehensive income and was expected to be amortized into earnings over the following twelve months.
- On May 5, 2014, NCM agreed to acquire Screenvision for $375 million, consisting of $225 million in cash and $150 million in NCM common stock. The transaction requires antitrust and other approvals and is expected to be financed with additional debt. Management estimated approximately $30 million of annual operating cost synergies, but realization is uncertain.
- The Screenvision agreement includes a potential $28.84 million termination fee payable by NCM under specified circumstances, including failure to obtain HSR approval in certain circumstances.
- The Screenvision transaction could increase leverage, integration costs, regulatory risk and execution risk. The filing states that no material changes occurred to previously disclosed risk factors other than those related to the proposed transaction.
Most important facts for investors to verify
- Whether national advertising utilization and CPM trends stabilize or continue to decline.
- The sustainability of local advertising growth and the effect of the loss of Fathom Events revenue.
- Available cash at NCM, Inc. versus cash held at NCM LLC that is not available for NCM, Inc. obligations.
- Debt covenant compliance, revolver availability, variable-rate exposure and the maturity of the $14.0 million revolver portion due December 31, 2014.
- The timing, financing, regulatory approval and final consideration for the Screenvision acquisition, including any required additional debt.
- The company’s ability to fund dividends, tax receivable agreement payments and founding-member distributions while maintaining adequate liquidity.
- The impact of related-party arrangements with AMC, Regal, Cinemark and other affiliates on reported revenue, expenses and cash distributions.