National CineMedia, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016, compared with three months ended April 2, 2015. Financial statements are unaudited. National CineMedia operates North America’s largest digital in-theatre advertising network through NCM LLC, with long-term exhibitor and network-affiliate agreements. Approximately 21 years remained on the founding-member ESAs at quarter-end. NCM, Inc. owned 43.6% of NCM LLC and consolidated its results.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $76.2 million | $76.9 million | (0.9%) |
| Operating income (loss) | $5.8 million | $(16.7) million | Improved $22.5 million |
| Operating margin | 7.6% | (21.7%) | Improved |
| Consolidated net loss | $(8.5) million | $(30.2) million | Improved $21.7 million |
| Net loss attributable to NCM, Inc. | $(4.3) million | $(9.0) million | Improved 52.2% |
| Loss per diluted share | $(0.07) | $(0.15) | Improved |
| Adjusted OIBDA | $24.0 million | $27.7 million | (13.4%) |
| Adjusted OIBDA margin | 31.5% | 36.0% | Down 4.5 percentage points |
| Theatre attendance | 172.3 million | 161.4 million | 6.8% |
Revenue was essentially flat despite higher attendance. National advertising revenue declined 0.8% to $50.2 million, local and regional revenue increased 0.5% to $18.8 million, and founding-member beverage revenue declined 5.3% to $7.2 million. Total advertising revenue per attendee fell 7.1% to $0.442.
National inventory utilization fell to 81.3% from 99.9%, while national advertising CPM increased 7.7%, excluding beverage revenue. Management attributed lower utilization primarily to reduced content-partner spending. Branded-content revenue increased by $2.5 million.
Operating expenses declined 24.8% to $70.4 million because Q1 2015 included $33.4 million of Screenvision merger termination fees and related costs. Excluding that item, operating expenses increased 16.9%, driven by higher theatre access fees, selling and marketing costs, administrative costs, share-based compensation and CEO transition costs.
Cash flow, debt and liquidity
| Metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $14.2 million | $31.7 million |
| Marketable securities | $59.5 million | $53.7 million |
| Cash, cash equivalents and marketable securities | $73.7 million | $85.4 million |
| Revolver availability | $50.0 million | $69.0 million |
| Total liquidity | $123.7 million | $154.4 million |
| Gross borrowings | $955.0 million | $936.0 million |
| Debt carrying value | $944.8 million | $925.4 million |
| Total equity/(deficit) | $(173.3) million | $(171.7) million |
Operating cash flow was $23.7 million versus $0.3 million in the prior-year quarter, primarily reflecting collections of receivables and the lower net loss. Investing cash flow was $(9.4) million, including $3.9 million of capital expenditures. Financing cash flow was $(31.8) million, including $15.0 million of dividends, $32.4 million of distributions to founding members, $52.0 million of debt repayments and $71.0 million of borrowings.
Debt consisted of $85.0 million drawn on the revolver, $270.0 million of term loans, $200.0 million of 7.875% senior unsecured notes and $400.0 million of 6.0% senior secured notes. The revolver and term loans mature in 2019; the notes mature in 2021 and 2022. NCM LLC was in compliance with its covenants, including a 3.4x net senior secured leverage ratio versus a 6.5x maximum. Approximately 63% of borrowings carried fixed rates. A 100-basis-point rate change would affect annual cash interest expense by approximately $3.6 million.
Material changes and unusual items
- The prior-year quarter included $33.4 million of Screenvision merger termination fees and related costs; no such costs were recorded in Q1 2016.
- Q1 2016 included $2.9 million of CEO transition costs and higher share-based compensation, including costs associated with modifying awards for the former CEO.
- The company adopted several accounting updates, including the debt issuance cost presentation standard. Management reported no material impact from the adoptions.
- NCM LLC issued 1.4 million common membership units to founding members for theatre additions, recording a $21.1 million intangible asset without cash consideration. NCM, Inc.’s ownership declined to 43.6% from 43.8% at year-end.
- The company paid $23.5 million under its tax receivable agreement during the quarter and had $153.7 million payable under that agreement at March 31, 2016.
- A $0.22 per-share dividend was declared on April 29, 2016, totaling approximately $13.2 million, payable June 2, 2016.
Outlook, risks and contingencies
Management did not provide specific quantitative full-year revenue or earnings guidance in the filing. Management expects network expansion, additional inventory, audience targeting and improved campaign analytics to support future advertising growth. The business is seasonal, with typically lower first-quarter revenue and stronger results in the second through fourth quarters.
- Advertising demand, inventory utilization, CPM volatility and competition from television, online, mobile and other video platforms could materially affect results.
- Upfront advertising commitments may include cancellation or reduction options, creating reliance on the scatter market to replace cancelled commitments.
- Founding-member theatre access fees increase annually and will receive an 8% per-patron increase in fiscal 2017; a minimum aggregate fee equal to 12% of defined advertising revenue also applies.
- Minimum revenue guarantees to network affiliates could require future payments of up to $41.2 million over remaining agreement terms; no liability was recorded because expected revenue shares exceeded the guarantees.
- Tax positions remain subject to examination. Unrecognized tax benefits were $3.9 million, excluding interest and penalties; approximately $2.2 million may decrease over the next 12 months as statutes of limitation expire.
- The filing states that no pending legal proceedings are expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors.
Investor verification items
- Verify whether the sharp decline in inventory utilization persists and whether higher CPMs can offset lower impressions sold.
- Reconcile Adjusted OIBDA with GAAP results and separately assess the recurring effect of CEO transition and share-based compensation costs.
- Monitor total liquidity, revolver usage, debt maturities, variable-rate exposure and compliance with the 6.5x leverage covenant.
- Assess dividend sustainability after tax receivable agreement payments, founding-member distributions, capital expenditures and debt service.
- Review the effect of the 2017 theatre access fee increase and further founding-member theatre additions or dispositions on margins and NCM, Inc.’s ownership percentage.
- Confirm the timing and amount of the negative 2015 available-cash distribution balance that will be netted against Q2 2016 distributions.