Business Context and Reporting Period
National CineMedia, Inc. operates North America’s largest digital in-theatre advertising network and distributes Fathom Events through long-term exhibitor services agreements with AMC, Regal and Cinemark, plus network affiliate agreements. This unaudited Form 10-Q covers the three and nine months ended September 26, 2013, compared with September 27, 2012.
As of September 26, 2013, NCM, Inc. owned 47.2% of NCM LLC; founding members owned the remaining exchangeable units. Advertising represented 94.4% of third-quarter revenue and 93.6% of year-to-date revenue.
Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $135.1 million | $143.7 million | $340.1 million | $332.9 million |
| Operating income | $67.4 million | $78.1 million | $147.0 million | $140.4 million |
| Operating margin | 49.9% | 54.3% | 43.2% | 42.2% |
| Consolidated net income | $42.3 million | $49.0 million | $76.2 million | $48.8 million |
| Net income attributable to NCM, Inc. | $13.7 million | $16.7 million | $22.2 million | $13.9 million |
| Diluted EPS | $0.24 | $0.30 | $0.40 | $0.25 |
| Adjusted OIBDA | $76.7 million | $85.1 million | $172.0 million | $162.9 million |
| Adjusted OIBDA margin | 56.8% | 59.2% | 50.6% | 48.9% |
Advertising revenue was $127.6 million in the third quarter and $318.2 million for the nine months. Fathom Events revenue was $7.5 million and $21.9 million, respectively. Third-quarter theatre attendance increased 9.6% year over year to 192.0 million; year-to-date attendance increased 2.8% to 533.7 million.
Cash Flow, Debt and Liquidity
- Nine-month operating cash flow was $113.9 million, compared with $32.2 million in the prior-year period.
- Investing cash flow was $(39.9) million, including $7.9 million of capital expenditures, $8.9 million of intangible-asset purchases and net purchases of marketable securities.
- Financing cash flow was $(76.6) million, including $36.4 million of dividends and $57.7 million of distributions to founding members.
- Cash and cash equivalents were $69.8 million at September 26, 2013, and short-term marketable securities were $57.4 million, for total cash and securities of $127.2 million.
- Reported total liquidity, including $110.0 million of revolving-credit availability, was $237.2 million.
- Total borrowings were $884.0 million, consisting of $14.0 million under 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 was in compliance with debt covenants. Net senior secured leverage was 2.9 times versus a 6.5-times covenant limit.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 6.0%, primarily because national advertising revenue fell 13.1% as inventory utilization and CPMs decreased. A decline in revenue from one significant client was a major factor.
- Local advertising revenue increased 7.8%, founding-member beverage revenue increased 15.0%, and Fathom Events revenue increased 31.6% in the quarter.
- Year-to-date revenue increased 2.2%, supported by 1.7% growth in national advertising and 13.7% growth in local advertising, partly offset by a 19.8% decline in Fathom Events revenue.
- Third-quarter operating income decreased 13.7% and Adjusted OIBDA decreased 9.9%; year-to-date operating income increased 4.7% and Adjusted OIBDA increased 5.6%.
- Depreciation and amortization increased 44.0% in the quarter and 26.2% year to date, reflecting higher amortization of intangible assets from network additions and higher equipment investment.
- Year-to-date non-operating expense decreased $25.0 million because the prior-year period included a $26.7 million loss on terminated interest-rate swaps and a $40.2 million cash payment for swap terminations.
- Cash flow from operations improved substantially because the prior-year period included the swap-termination payment and a larger increase in receivables.
- NCM LLC issued membership units and recorded approximately $160.2 million of intangible assets during the nine months, primarily for founding-member theatre additions and Cinemark’s acquisition of Rave Cinemas.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal quantitative revenue or earnings guidance. Management expects network expansion, additional advertising impressions and broader geographic coverage to support future revenue, operating income and cash flow.
- Management expects to continue selling 60 seconds of advertising time to founding members under beverage concessionaire arrangements through the remainder of 2013, although future beverage-contract renegotiations could change the required amount.
- A non-binding agreement was signed to spin off Fathom Events into a new entity owned 30% by each founding member and 10% by NCM LLC. NCM LLC expected to receive a $25 million promissory note or notes and transition-services fees; closing was expected in the fourth quarter of 2013. The transaction is related-party and subject to independent review.
- The term loan and revolver are floating-rate and unhedged following termination of interest-rate swaps. A 100-basis-point change in market rates would affect annual cash interest expense by approximately $2.8 million based on the reported balances.
- Minimum revenue guarantees to network affiliates could require future payments of up to $32.2 million; no liability was recorded because expected revenue sharing exceeded the guarantees.
- The business is seasonal and sensitive to advertising demand, CPMs, inventory utilization, theatre attendance, film releases, client concentration and macroeconomic conditions. The company also has substantial leverage and significant related-party payments to founding members.
- The IRS completed examinations of NCM LLC’s 2007 and 2008 tax returns with a “No Adjustments Letter”; the filing reports no resulting financial-statement impact.
- A $0.22-per-share dividend, approximately $12.8 million, was declared on October 30, 2013 for payment on November 27, 2013.
Most Important Facts to Verify
- Whether the Fathom Events spin-off closed on the expected terms and how the transaction affected revenue, costs, related-party balances and future cash flows.
- National advertising inventory utilization, CPM trends and dependence on large advertising clients following the third-quarter decline.
- Compliance with debt covenants, revolver availability, refinancing needs and sensitivity to higher floating interest rates.
- The sustainability of distributions from NCM LLC and NCM, Inc.’s ability to fund tax-sharing payments and dividends.
- The economic impact of founding-member theatre access fees, beverage advertising arrangements and other related-party transactions.
- Whether network expansion and theatre-attendance growth offset higher amortization, digital-equipment costs and the decline in Fathom Events revenue year to date.