National CineMedia, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. operates the largest digital in-theatre advertising network in North America through National CineMedia, LLC. Revenue is generated primarily from advertising sold under long-term exhibitor services agreements with AMC, Regal and Cinemark, and agreements with third-party theatre affiliates. The unaudited quarter ended April 2, 2015 is compared with the quarter ended March 27, 2014.
As of April 2, 2015, NCM, Inc. owned 45.1% of NCM LLC; the founding members owned the remaining 54.9%. The company operates as one reportable segment: advertising.
Financial Performance and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Advertising revenue | $76.9 million | $70.2 million | Up 9.5% |
| Operating expenses | $93.6 million | $57.4 million | Up 63.1% |
| Operating income/(loss) | $(16.7) million | $12.8 million | Declined |
| Consolidated net loss | $(30.2) million | $(4.6) million | Loss increased |
| Net loss attributable to NCM, Inc. | $(9.0) million | $(3.1) million | Loss increased |
| Basic and diluted loss per share | $(0.15) | $(0.05) | Loss increased |
| Adjusted OIBDA | $27.7 million | $22.6 million | Up 22.6% |
| Adjusted OIBDA margin | 36.0% | 32.2% | Up 3.8 percentage points |
| Operating cash flow | $0.3 million | $11.9 million | Down $11.6 million |
National advertising revenue increased 19.2% to $50.9 million, while local advertising revenue increased 1.7% to $18.4 million. Founding-member beverage advertising revenue declined 19.1% to $7.6 million. Total theatre attendance declined 3.1% to 161.4 million, but total advertising revenue per attendee increased 12.8% to $0.476.
National inventory utilization increased to 99.9% from 72.6%, and national impressions delivered increased 38.2%. These gains were partly offset by an 11.1% decline in national advertising CPMs, excluding beverage revenue.
Cash, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $12.9 million at April 2, 2015, compared with $13.4 million at January 1, 2015.
- Cash, cash equivalents and marketable securities totaled $77.5 million, down from $80.6 million at year-end 2014.
- Total liquidity, including $67.0 million of revolver availability, was $144.5 million, down from $193.6 million at January 1, 2015.
- Total debt was $938.0 million, including $68.0 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 revolver and term loans mature in 2019; the senior unsecured notes mature in 2021; and the senior secured notes mature in 2022.
- The consolidated net senior secured leverage ratio was 3.6 times versus a covenant limit of 6.5 times. The company was in compliance with its debt covenants.
- A 100-basis-point change in applicable interest rates would affect annual cash interest expense by approximately $3.4 million based on outstanding variable-rate debt.
- Total liabilities were $1.205 billion and consolidated equity remained negative at $(219.8) million.
Material Changes Versus the Prior Comparable Period
- The company recorded $33.4 million of Screenvision merger termination and related costs in Q1 2015, consisting primarily of a $26.8 million termination payment and approximately $6.6 million of legal and other professional costs. No comparable expense occurred in Q1 2014.
- The terminated Screenvision transaction drove the decline from operating income of $12.8 million to an operating loss of $16.7 million and materially reduced liquidity.
- Excluding merger-related costs, operating expenses increased 4.9% to $60.2 million, while revenue increased 9.5%.
- Adjusted OIBDA improved despite the GAAP loss, reflecting higher national advertising revenue and greater inventory utilization.
- Operating cash flow declined to $0.3 million, primarily because of the higher net loss and related working-capital effects.
- Revolver borrowings increased by $46.0 million during the quarter to fund merger-related costs. The company paid $13.3 million of dividends, compared with $42.3 million in Q1 2014, which included the prior-year special dividend.
- NCM, Inc.’s ownership of NCM LLC decreased from 45.8% to 45.1%, increasing the portion of consolidated loss attributable to noncontrolling interests.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 capital expenditures of $13.0 million to $15.0 million, primarily for digital content, inventory, audience-targeting, reporting and network systems.
- As of May 8, 2015, 83% of the 2015 national budget had been booked, compared with 60% of prior-year actual national revenue booked at the comparable point.
- Management expected national CPMs to stabilize during the remainder of 2015 because of stronger upfront bookings, although pricing remained pressured by online, mobile and other video advertising competition.
- One founding member planned to reduce beverage advertising inventory from 60 seconds to 30 seconds beginning in July 2015 for a six-month test. Management estimated a potential second-half 2015 beverage revenue reduction of approximately $2.8 million, subject to replacement by other advertisers.
- Because of the merger-related costs, NCM LLC calculated negative available cash distributions of $25.5 million for Q1 2015. No distribution was expected for Q2 2015, and the negative amount is to be netted against distributions for Q2 2016, payable in Q3 2016.
- Management stated that it did not expect additional material expenses related to the terminated merger and believed operating cash, cash on hand and revolver availability would fund working capital, debt service and capital requirements for the next twelve months.
- Minimum revenue guarantees to network affiliates could require future payments of up to $35.1 million over the remaining contract terms; no material liability was recorded.
- The business is seasonal, with typically lower first-quarter advertising demand and theatre attendance. Results may also be affected by advertising-market conditions, competition, attendance, CPMs, customer cancellations, leverage and variable interest rates.
- The Department of Justice antitrust action related to the Screenvision merger was dismissed after the merger agreement was terminated.
Important Facts for Investors to Verify
- Assess whether the sharp increase in national inventory utilization can be sustained without further CPM pressure.
- Monitor the effect of the beverage advertising reduction and whether replacement advertisers offset the estimated $2.8 million revenue impact.
- Reconcile Adjusted OIBDA growth with GAAP losses, negative equity and very limited Q1 operating cash generation.
- Track revolver usage, leverage covenant headroom and the timing of repayment of merger-related borrowings.
- Evaluate the sustainability of quarterly dividends given the delayed NCM LLC distribution and the company’s reliance on cash and marketable securities.
- Review related-party arrangements with founding members, including theatre access fees, tax receivable agreement payments, ownership dilution and mandatory distributions.
- Confirm execution of the expected 2015 capital expenditure program and the contribution from newly added affiliate theatre circuits.