National CineMedia, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2016, compared with October 1, 2015. The financial statements are unaudited. NCM operates a North American in-theatre advertising network through NCM LLC, with approximately 20 years remaining on founding-member exhibitor services agreements.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $113.5 million | $111.7 million | $305.1 million | $310.1 million |
| Operating income | $48.4 million | $47.8 million | $100.7 million | $86.5 million |
| Consolidated net income | $21.7 million | $26.9 million | $38.7 million | $30.0 million |
| Net income attributable to NCM, Inc. | $8.2 million | $7.7 million | $10.7 million | $8.8 million |
| Diluted EPS | $0.13 | $0.13 | $0.18 | $0.15 |
| Adjusted OIBDA | $60.9 million | $59.6 million | $144.3 million | $154.7 million |
| Adjusted OIBDA margin | 53.7% | 53.4% | 47.3% | 49.9% |
- Q3 revenue increased 1.6%, while nine-month revenue declined 1.6%.
- Q3 operating income rose 1.3%; nine-month operating income increased 16.4%, primarily because 2015 included $34.3 million of Screenvision merger termination costs.
- Q3 revenue growth reflected a 3.8% increase in national advertising revenue and a 17.2% increase in founding-member beverage revenue, partly offset by an 8.8% decline in local and regional revenue.
- Nine-month theatre attendance increased 1.3% to 524.1 million, but total advertising revenue per attendee declined 2.8% to $0.582.
- Cash provided by operating activities was $90.9 million for the nine months, compared with $61.9 million in the prior-year period. Capital expenditures were $9.0 million.
- Financing cash flow was negative $111.9 million, including $41.4 million of dividends, $207.9 million for redemption of the 2021 notes, and $250.0 million of proceeds from the 2026 notes.
- At September 29, 2016, cash and cash equivalents were $5.6 million, marketable securities totaled $48.4 million, and total liquidity, including revolver availability, was $226.0 million.
- Total borrowings were $923.0 million, with a carrying value of long-term debt of $911.9 million. The company reported a 3.1x consolidated net senior secured leverage ratio against a 6.5x covenant limit.
Material changes versus the prior comparable period
- National advertising revenue increased in Q3 despite a 0.2% decline in impressions sold, supported by a 2.1% increase in national CPMs. Nine-month national revenue declined 1.2% because impressions sold fell 9.7%, partially offset by a 5.4% CPM increase and higher online and mobile revenue.
- Local and regional revenue weakened, primarily because of fewer and smaller contracts exceeding $100,000 and the absence of two contracts above $1 million in Q3.
- Adjusted OIBDA increased 2.2% in Q3 but declined 6.7% for the nine months. The nine-month margin fell to 47.3% from 49.9%, reflecting higher selling and marketing, administrative, depreciation and amortization, and theatre access costs.
- Operating expenses before merger-related costs increased 8.0% for the nine months. Administrative costs included $3.4 million of CEO transition costs, while share-based compensation also increased.
- NCM LLC issued $250.0 million of 5.75% senior unsecured notes due 2026 and redeemed its $200.0 million 7.875% notes due 2021. The redemption generated a $10.4 million loss, including a $7.9 million premium and $2.5 million write-off of debt issuance costs.
- Cash and marketable securities declined from $85.4 million at December 31, 2015 to $54.0 million at September 29, 2016, while revolver availability increased from $69.0 million to $172.0 million.
- NCM, Inc.'s ownership of NCM LLC declined to 43.6% from 43.8%, increasing the portion of earnings attributable to noncontrolling interests.
Outlook, risks, contingencies and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management expects NCM LLC operating cash flow and cash on hand to fund working capital, debt service, capital expenditures and other requirements for the next twelve months.
- Regular dividends are discretionary. The company declared a $0.22-per-share dividend on November 3, 2016, approximately $13.2 million, payable December 2, 2016.
- Management identifies risks from advertising-market volatility, competition from online, mobile, television and other video platforms, changes in theatre attendance, movie release windows, reserve seating, consumer confidence and advertising-client budgets.
- Advertising utilization and CPMs can vary materially by quarter. Q3 national inventory utilization declined to 132.5% from 145.8%; nine-month utilization declined to 112.9% from 127.0%.
- Approximately 70% of borrowings carried fixed rates. A 100-basis-point change in rates on the variable-rate term loan and revolver would affect annual cash interest expense by approximately $2.7 million.
- The company had a maximum potential obligation of $40.2 million under network-affiliate minimum revenue guarantees, with no liability recorded because expected revenue shares exceeded the guaranteed amounts.
- The company reversed approximately $2.9 million of tax reserves in Q3 after expiration of a statute of limitations. Future tax resolutions could materially affect income tax expense and operating cash flow.
- AMC's proposed acquisition of Carmike could affect NCM LLC ownership, theatre access, integration payments, distributions and NCM, Inc.'s earnings per share; the filing states that the outcome was uncertain.
- The company reported no material pending litigation, no defaults under senior securities and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the sustainability of revenue and margin performance given declining revenue per attendee and lower advertising utilization.
- Review debt maturities, variable-rate exposure, covenant compliance and the economic benefits of refinancing the 2021 notes with the 2026 notes.
- Assess whether cash distributions from NCM LLC can consistently cover NCM, Inc.'s dividends, taxes and tax receivable agreement payments.
- Monitor the impact of founding-member ownership changes and any theatre acquisitions, dispositions or exchanges of NCM LLC units.
- Evaluate the effect of local and regional advertising weakness, content-partner spending reductions and competition from digital advertising platforms.
- Review the potential financial impact of the $40.2 million in minimum revenue guarantees and the $160.9 million payable to founding members under the tax receivable agreement.