National CineMedia, Inc. — 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 and network affiliate agreements. The filing covers the three and nine months ended September 25, 2014, compared with the periods ended September 26, 2013. The financial statements are unaudited and reflect seasonal operating patterns.
Fathom Events was sold on December 26, 2013; advertising is therefore the Company’s sole business activity and reportable segment in 2014.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $100.8 million | $135.1 million | $270.9 million | $340.1 million |
| Operating income | $40.7 million | $67.4 million | $93.8 million | $147.0 million |
| Operating margin | 40.4% | 49.9% | 34.6% | 43.2% |
| Consolidated net income | $19.4 million | $42.3 million | $32.7 million | $76.2 million |
| Net income attributable to NCM, Inc. | $4.8 million | $13.7 million | $5.3 million | $22.2 million |
| Diluted EPS | $0.08 | $0.24 | $0.09 | $0.40 |
| Adjusted OIBDA | $52.2 million | $76.7 million | $126.8 million | $172.0 million |
| Adjusted OIBDA margin | 51.8% | 56.8% | 46.8% | 50.6% |
Q3 advertising revenue declined 21.0% to $100.8 million. National advertising revenue fell 31.0% to $62.9 million, while local advertising revenue increased 15.6% to $28.9 million. Founding-member beverage advertising revenue decreased 21.7% to $9.0 million. Fathom Events contributed no revenue in 2014 versus $7.5 million in Q3 2013.
For the first nine months, advertising revenue decreased 14.9% to $270.9 million, and Fathom Events revenue declined to zero from $21.9 million. Total theatre attendance decreased 14.8% in Q3 and 5.3% year to date. National advertising revenue per attendee declined 18.8% in Q3 and 18.7% year to date, while local advertising revenue per attendee increased 36.2% and 19.3%, respectively.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Operating cash flow was $86.9 million for the first nine months of 2014, compared with $113.9 million in 2013.
- Investing activities provided $1.7 million, versus $39.9 million used in 2013. Capital expenditures were $6.9 million.
- Financing activities used $118.7 million, including $68.1 million of dividends and $55.7 million of distributions to founding members.
- Cash and cash equivalents declined to $24.6 million from $54.7 million at December 26, 2013. Cash, cash equivalents, and marketable securities totaled $84.3 million.
- Total debt was $895.0 million, consisting of $25.0 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 Company reported $124.0 million of revolver availability in its liquidity table; the underlying facility had total availability of $149.0 million, including $14.0 million scheduled for repayment by December 31, 2014.
- The consolidated net senior secured leverage ratio was 3.6x against a 6.5x covenant limit. Management stated that operating cash flow and cash on hand should fund working capital, debt service, capital expenditures, and other requirements for the next twelve months.
- Approximately 67% of borrowings carried fixed interest rates. A 100-basis-point change in variable rates would affect annual cash interest expense by approximately $3.0 million.
Material Changes Versus Prior Comparable Period
- Total revenue decreased 25.4% in Q3 and 20.3% for the first nine months, primarily due to weaker national advertising and the discontinued Fathom Events business.
- Operating expenses declined 11.2% in Q3 and 8.3% year to date, but the reduction did not offset the revenue decline. Depreciation and amortization increased 19.4% in Q3 and 28.7% year to date due to higher amortization of intangible assets.
- Operating income decreased 39.6% in Q3 and 36.2% year to date. Adjusted OIBDA declined 31.9% and 26.3%, respectively, with margin contracting by 5.0 and 3.8 percentage points.
- Net income attributable to NCM, Inc. declined 65.0% in Q3 and 76.1% year to date. The decline was partly offset by lower income attributable to noncontrolling interests and lower income taxes.
- NCM, Inc.’s ownership of NCM LLC decreased to 45.8% from 46.1% at December 26, 2013, increasing the portion of earnings allocated to noncontrolling interests.
Guidance, Outlook, Risks, and Unusual Items
Management reported that fourth-quarter 2014 national advertising projections were approximately 20% above the fourth quarter of 2013 and upfront bookings were more than 125% higher for the period from October 1, 2014 through the end of 2015 versus the comparable prior five-quarter period. Some commitments include cancellation options. Management expected 2014 advertising CPMs to be approximately 17% to 20% below the prior year, with CPMs expected to begin stabilizing in 2015.
The proposed $375 million Screenvision merger consisted of $225 million in cash and $150 million in NCM, Inc. shares. On November 3, 2014, after the reporting date, the Department of Justice filed an antitrust action seeking to block the transaction. If the merger is terminated under specified circumstances, NCM may owe Screenvision approximately $28.8 million. The transaction also contemplated a $250 million term loan and increased leverage.
Other considerations include competition from online, mobile, television, and other video advertising platforms; declining national CPMs; advertising and theatre-attendance seasonality; dependence on founding members and network affiliates; variable-rate debt; related-party transactions; and minimum revenue guarantees of up to $35.4 million over the remaining terms of network affiliate agreements. No liability was recorded for the guarantees because expected affiliate revenue shares exceeded the guaranteed amounts.
The Company declared a $0.22-per-share dividend on October 29, 2014, payable December 5, 2014. Discontinued interest-rate swaps continued to generate amortization expense; approximately $4.0 million remained in accumulated other comprehensive loss at September 25, 2014 and was expected to be amortized through February 2015.
Most Important Facts for Investors to Verify
- Whether the DOJ action delays, prevents, or materially changes the Screenvision merger and whether the potential $28.8 million termination fee becomes payable.
- Whether national advertising CPM declines stabilize as projected and whether the reported fourth-quarter bookings convert into revenue.
- The sustainability of operating cash flow, quarterly distributions from NCM LLC, dividends, and payments under the tax receivable agreement.
- Debt covenant compliance, the December 31, 2014 revolver repayment, variable-rate exposure, and any additional borrowing related to Screenvision.
- The effect of declining theatre attendance, competition from digital advertising platforms, and continued dependence on founding-member relationships.
- The allocation of earnings between NCM, Inc. and noncontrolling interests as NCM, Inc.’s ownership percentage changes.