National Cinemedia, Inc. quarterly report, Q2 FY2015

National CineMedia, Inc. 10-Q Summary

Business context and reporting period

National CineMedia, Inc. operates North America’s largest digital in-theatre advertising network through National CineMedia, LLC. Revenue is generated primarily from advertising sold under long-term exhibitor services agreements with AMC, Regal and Cinemark and multi-year network affiliate agreements. The filing covers the quarter and six months ended July 2, 2015, compared with the periods ended June 26, 2014. Results are unaudited and the business is seasonal.

As of July 2, 2015, NCM, Inc. owned 45.2% of NCM LLC; the founding members owned the remaining 54.8%. The company operated as one advertising reportable segment.

Key financial metrics

Metric	Three months ended July 2, 2015	Six months ended July 2, 2015
Advertising revenue	$121.5 million	$198.4 million
Operating income	$55.4 million	$38.7 million
Consolidated net income	$33.3 million	$3.1 million
Net income attributable to NCM, Inc.	$10.1 million	$1.1 million
Diluted earnings per share	$0.17	$0.02
Adjusted OIBDA	$67.4 million	$95.1 million
Adjusted OIBDA margin	55.5%	47.9%
Operating cash flow	Not separately provided for the quarter	$10.2 million

Second-quarter operating margin was approximately 45.6%, compared with approximately 40.3% in the prior-year quarter. Six-month operating margin was approximately 19.5%, compared with approximately 31.2% in the prior-year period, primarily because of Screenvision merger termination costs.

• Second-quarter revenue increased 21.6%; national advertising revenue increased 30.4%, local advertising revenue increased 7.4%, and founding-member beverage revenue decreased 8.2%.
• Six-month revenue increased 16.6%; national advertising revenue increased 26.1%, local advertising revenue increased 4.8%, and founding-member beverage revenue decreased 13.5%.
• Total theatre attendance increased 9.4% in the quarter and 3.3% year to date.
• National advertising revenue per attendee increased 19.2% in the quarter and 22.2% year to date. Total advertising revenue per attendee, including beverage revenue, increased 11.1% and 12.9%, respectively.
• Cash, cash equivalents and marketable securities totaled $69.4 million at July 2, 2015, compared with $80.6 million at January 1, 2015.
• Total liquidity, including $70.0 million of revolver availability, was $139.4 million, compared with $193.6 million at year-end 2014.
• Total debt was $935.0 million, including $65.0 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.
• Net senior secured leverage was 3.3 times versus a 6.5-times covenant limit. The company stated that it was in compliance with its debt covenants.
• Total assets were $1.01 billion, total liabilities were $1.23 billion and total equity was a deficit of $221.6 million, including a $421.1 million NCM, Inc. stockholders’ deficit.

Cash flow, dividends and liquidity

• Six-month operating cash flow was $10.2 million, down from $36.6 million in the prior-year period.
• Investing cash flow was $3.4 million, primarily reflecting marketable-securities activity and $4.8 million of property and equipment purchases.
• Financing cash flow was negative $15.2 million, including $26.4 million of dividends, $32.9 million of distributions to founding members, $113.0 million of borrowings and $70.0 million of repayments.
• Cash and cash equivalents declined to $11.8 million from $13.4 million at January 1, 2015. Cash held by NCM LLC that was unavailable for NCM, Inc. obligations was $5.7 million.
• NCM LLC generated approximately $45.8 million of available cash distributions for the second quarter, of which approximately $20.7 million was payable to NCM, Inc. in the third quarter.
• The company declared a $0.22-per-share dividend on August 5, 2015, approximately $13.0 million in total, payable September 3, 2015.

Material changes versus the prior comparable period

• Revenue growth was driven by higher national impressions sold, stronger inventory utilization, higher second-quarter national CPMs and increased theatre attendance. National inventory utilization rose to 133.3% in the second quarter from 122.9% and to 118.3% year to date from 98.7%.
• Second-quarter operating expenses increased 10.9%, slower than revenue growth. Six-month operating expenses increased 36.5%, principally because of $34.3 million of Screenvision termination fees and related costs versus $1.7 million in the prior-year period.
• Screenvision merger termination costs included an approximately $26.8 million termination payment and approximately $7.5 million of legal, accounting, advisory and other professional fees during the six months. The merger agreement was terminated March 16, 2015 after the Department of Justice had sought to enjoin the transaction.
• Six-month operating income declined 27.1% because of the merger-related costs, although second-quarter operating income increased 37.5%.
• Second-quarter net income attributable to NCM, Inc. increased 180.6% to $10.1 million. Six-month net income attributable to NCM, Inc. increased to $1.1 million from $0.5 million, despite the merger-related charges.
• Non-operating expense declined 12.4% in the quarter and 9.5% year to date, primarily because amortization of terminated derivatives ended in February 2015.
• NCM LLC issued 2.16 million common membership units to founding members for theatre additions, resulting in a $31.4 million intangible-asset addition and reducing NCM, Inc.’s ownership from 45.8% at January 1, 2015 to 45.2%.

Guidance, outlook, commentary and risks

• Management expected fiscal 2015 capital expenditures of $13.0 million to $15.0 million, $2.0 million to $3.0 million above its initial estimate, primarily because of accelerated technology and management-system development.
• Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for working capital, debt service, capital expenditures and other requirements for the next twelve months.
• One founding member planned to reduce beverage advertising 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, with the possibility that other national advertisers could replace some or all of the inventory.
• Management expected new affiliate relationships and additional inventory from shorter entertainment segments to support future impressions, geographic coverage and revenue, but noted that growth depends on advertising demand.
• Advertising demand, CPM volatility, competition from television, online, mobile and other video platforms, client cancellations of upfront commitments, theatre attendance, seasonality and interest-rate changes remain important risks.
• Approximately 36% of borrowings were variable-rate as of July 2, 2015. A 100-basis-point change in underlying rates would change annual cash interest expense by approximately $3.4 million.
• Minimum revenue guarantees to network affiliates could require up to $32.3 million of future payments over the remaining contract terms; no liability was recorded because expected revenue-share payments exceeded the guarantees.
• The company reported no material changes to previously disclosed risk factors, no material pending litigation, and effective disclosure controls as of July 2, 2015.
• After quarter-end, CEO, Chairman and director Kurt Hall announced his intent to resign upon appointment of a successor. The company began a CEO search and expected Hall to serve as a 24-month consultant during the transition.

Important facts for investors to verify

• Whether the strong second-quarter national advertising growth and inventory utilization are sustainable after seasonal effects and upfront-campaign timing.
• The extent to which the founding member beverage-advertising reduction affects second-half revenue and whether replacement advertising offsets the decline.
• Liquidity available to NCM, Inc. after considering cash held at NCM LLC, dividend obligations, tax receivable agreement payments and mandatory founding-member distributions.
• Debt-service capacity, revolver availability, covenant headroom and sensitivity to variable interest rates.
• The effect of continued NCM LLC unit issuances on NCM, Inc.’s ownership percentage, noncontrolling interests and per-share results.
• The assumptions underlying Adjusted OIBDA and Adjusted OIBDA margin, which exclude depreciation and amortization, share-based compensation and merger-related costs and are not GAAP measures.
• CEO succession execution and any related transition, compensation or strategic impacts.