National CineMedia, Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. (“NCM”) is a holding company that consolidates National CineMedia, LLC, a cinema advertising network. NCM sells on-screen, lobby, online, mobile and promotional advertising through long-term exhibitor services agreements with founding members and network affiliates. The report covers the 13 weeks ended March 28, 2019, compared with the 13 weeks ended March 29, 2018. Results are seasonal, with the first quarter typically representing a smaller portion of annual revenue.
- Approximately 18 years remained on founding-member exhibitor services agreements at quarter-end.
- The network had 20,944 screens, down from 21,172 at December 27, 2018, including a loss of 244 screens from one non-renewing affiliate.
- Reported theater attendance was 148.7 million, down 16.0% year over year.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $76.9 million | $80.2 million | Down 4.1% |
| Operating income | $10.9 million | $11.0 million | Down 0.9% |
| Adjusted OIBDA | $22.1 million | $23.3 million | Down 5.2% |
| Adjusted OIBDA margin | 28.8% | 29.1% | Down 0.3 percentage points |
| Net loss attributable to NCM, Inc. | $1.1 million | $1.9 million | Loss narrowed 42.1% |
| Basic and diluted loss per share | $0.01 loss | $0.03 loss | Improved |
| Operating cash flow | $46.0 million | $49.5 million | Down $3.5 million |
Revenue declined across national advertising, local advertising, regional advertising and founding-member beverage advertising. Revenue per attendee increased 14.1% to $0.517, while attendance declined materially. National advertising CPM increased 10.0%, and national inventory utilization increased to 104.1% from 95.2%.
Operating expenses decreased 4.6% to $66.0 million. Lower theater access fees, selling and marketing costs, administrative costs and share-based compensation largely offset higher advertising operating costs and depreciation. The adoption of ASC 842 reclassified $6.9 million of prior amortization into “amortization of intangibles recorded for network theater screen leases.”
Non-operating expense increased to $14.1 million from $13.5 million, primarily because of higher interest expense and a loss from remeasurement of the tax receivable agreement liability. These increases were partly offset by a $0.3 million gain on early retirement of debt and higher interest income. The company recorded a $0.6 million income tax benefit versus $1.0 million of tax expense in the prior-year quarter.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $64.0 million at March 28, 2019, compared with $41.4 million at December 27, 2018.
- Cash, cash equivalents and marketable securities totaled $82.4 million; management identified $77.7 million as available to NCM, Inc., excluding cash held by NCM LLC.
- Total liquidity, including revolver availability, was $215.6 million, consisting of $82.4 million of cash and marketable securities and $133.2 million of revolver availability.
- Total borrowings were $935.7 million before debt issuance costs, including $400.0 million of 2022 secured notes, $268.7 million of term debt, $230.0 million of 2026 unsecured notes and $37.0 million drawn on the revolver.
- Net debt carrying value was approximately $928.4 million before the current portion.
- Approximately 68% of borrowings carried fixed interest rates. A 100-basis-point change in rates affecting the term loan and revolver would change annual cash interest expense by approximately $3.0 million.
- Net cash used in financing activities was $38.4 million, including $14.0 million of dividends, $27.9 million of distributions to founding members and net debt repayments.
- NCM LLC’s net senior secured leverage ratio was 3.20x versus a 4.50x covenant, and net total leverage was 4.25x versus a 6.25x covenant.
Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for working capital, debt service, capital expenditures, tax receivable agreement payments and anticipated dividends over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Attendance decreased 16.0%, but revenue per attendee increased 14.1%, reflecting higher CPMs and improved pricing.
- Revenue decreased 4.1%, while operating income was broadly stable because operating expenses declined at a similar rate.
- Adjusted OIBDA declined 5.2% and margin contracted modestly to 28.8%.
- Net loss attributable to NCM, Inc. improved by $0.8 million, primarily because of the $1.6 million favorable change in income taxes, partly offset by higher non-operating expense.
- Operating cash flow declined, while investing cash flow improved by $24.4 million, principally because of marketable-securities maturities and sales.
- During the quarter, NCM LLC issued 1.04 million membership units to founding members and recorded a $7.6 million intangible asset through the annual common-unit adjustment.
- NCM repurchased and canceled $5.0 million principal amount of its 2026 notes, recording a $0.3 million gain.
- ASC 842 adoption resulted in a $21.7 million right-of-use asset and lease liabilities of $25.9 million at adoption, with $21.5 million of right-of-use assets and $25.6 million of lease liabilities reported at quarter-end.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal full-year revenue or earnings guidance. Management expects regular quarterly dividends to continue at the board’s discretion and declared a $0.17-per-share dividend, approximately $13.1 million, payable May 31, 2019.
- Advertising demand, theater attendance, customer spending, CPMs and inventory utilization may materially affect results. The company noted that lower attendance prevented it from fully recognizing customer demand and left a $4.7 million make-good balance for undelivered impressions.
- Revenue and cash flow are seasonal and may be affected by marketing cycles, movie releases, economic conditions and competing advertising platforms.
- Founding-member relationships are material: theater access fees were $19.1 million in Q1 2019, and founding members received or were owed mandatory distributions and other payments.
- Network affiliate agreements include minimum revenue guarantees with a maximum potential future payment obligation of $97.9 million over remaining contract terms; $0.5 million was accrued at quarter-end.
- The tax receivable agreement liability totaled $212.4 million, including current and long-term amounts owed to founding members.
- Debt refinancing is important because the revolver and term loan maturities depend on refinancing the 2022 notes by October 30, 2021; otherwise, those facilities may mature in December 2021.
- The filing states that ordinary-course legal proceedings are not expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors.
- Management reported effective disclosure controls as of March 28, 2019 and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether declining theater attendance continues to offset higher CPMs, pricing and revenue per attendee.
- The sustainability of the 28.8% Adjusted OIBDA margin and the company’s ability to convert operating cash flow into dividends and debt reduction.
- Debt refinancing plans for the $400.0 million 2022 notes and compliance with leverage covenants.
- The availability of cash at NCM, Inc. after accounting for NCM LLC restrictions, tax receivable agreement payments, founding-member distributions and dividends.
- The size and timing of future tax receivable agreement payments and the impact of related-party arrangements.
- Whether the $4.7 million make-good balance is reduced as attendance and advertising delivery improve.
- Potential exposure under $97.9 million of network affiliate minimum revenue guarantees and other long-term theater commitments.
- The effect of ASC 842 reclassifications on comparability of operating expenses, cash flows and non-GAAP measures.