National CineMedia, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia operates a digital in-theatre advertising network and distributes Fathom Events through long-term exhibitor services agreements with AMC, Regal and Cinemark, plus network affiliate agreements. The filing covers the 13 weeks ended March 28, 2013, compared with the three months ended March 29, 2012. Results are seasonal, with advertising demand and theatre attendance generally higher in the second through fourth quarters.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $82.2 million | $79.1 million | 3.9% |
| Advertising revenue | $73.7 million | $66.3 million | 11.2% |
| Fathom Events revenue | $8.5 million | $12.8 million | (33.6%) |
| Operating income | $21.6 million | $17.0 million | 27.1% |
| Operating margin | 26.3% | 21.5% | Up 4.8 points |
| Consolidated net income | $1.9 million | $0.7 million | Higher |
| Net loss attributable to NCM, Inc. | $(1.0) million | $(0.9) million | Loss increased |
| Adjusted OIBDA | $29.1 million | $24.8 million | 17.3% |
| Adjusted OIBDA margin | 35.4% | 31.4% | Up 4.0 points |
| Operating cash flow | $28.6 million | $(2.5) million | Improved $31.1 million |
National advertising revenue was $51.5 million, up 12.9%, while local advertising revenue was $13.3 million, up 22.0%. Advertising revenue per attendee increased 21.7% to $0.477, and revenue per attendee excluding founding-member beverage revenue increased 25.5% to $0.419. Total theatre attendance declined to 154.6 million from 169.0 million.
Cash and cash equivalents were $73.8 million at March 28, 2013, compared with $72.4 million at December 27, 2012. Short-term marketable securities were $25.0 million, producing cash, cash equivalents and marketable securities of $98.8 million. Including $110.0 million of revolving-credit availability, total liquidity was $208.8 million.
Total borrowings were $879.0 million, consisting of $14.0 million outstanding under the revolving facility, a $265.0 million term loan, $200.0 million of 7.875% senior unsecured notes due 2021 and $400.0 million of 6.0% senior secured notes due 2022. The company was in compliance with its debt covenants, including a 3.0 times consolidated net senior secured leverage ratio versus a 6.5 times limit. Consolidated equity remained negative at $(308.8) million, including $(428.4) million attributable to NCM, Inc. stockholders.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher national and local advertising, increased inventory utilization, higher advertising CPMs and online/mobile revenue growth.
- National inventory utilization increased to approximately 86.0% from 76.4%, while cinema network attendance declined 8.5% because of a weaker film release schedule.
- Fathom Events revenue declined because the Fathom Business Events division was wound down and consumer event nights declined to 19 from 25.
- Operating expenses decreased 2.4% to $60.6 million, primarily because of lower Fathom operating costs, partially offset by higher advertising operating and selling costs.
- Operating income and Adjusted OIBDA improved materially, but the company continued to report a net loss attributable to NCM, Inc. because of non-operating items, noncontrolling interests and taxes.
- Interest expense on borrowings declined $0.8 million, but amortization of terminated derivatives increased $2.2 million to $2.5 million. The company had no outstanding derivatives, while approximately $19.4 million of discontinued hedge losses remained in accumulated other comprehensive income.
- A non-cash $69.0 million intangible asset was recorded in exchange for subsidiary equity issued to founding members for rights related to newly added theatre screens and attendees.
Outlook, Commentary, Risks and Unusual Items
Management stated that contracted founding-member and affiliate theatres added during 2012 and early 2013 were expected to contribute approximately 26 million annual attendees and approximately 364 million additional salable national advertising impressions on a full-year pro forma basis. Marquee Cinemas, Sonora Entertainment Group and Xscape Theatres were expected to join the network in the second quarter of 2013.
Management expected to continue selling 60 seconds of advertising time to founding members under beverage concessionaire arrangements during the remainder of 2013. Future renegotiation of those arrangements could change the amount of time purchased by founding members.
On May 2, 2013, after quarter-end, the company amended its senior secured credit facility. The term loan increased from $265 million to $270 million, and interest-rate spreads were reduced. Management estimated that the refinancing would lower annual interest expense by approximately $1.2 million.
The IRS was examining NCM LLC’s 2007 and 2008 tax returns regarding the characterization of cash received by founding members around the IPO. An appeals conference was scheduled for May 14, 2013. The company disputed the IRS position; potential payments to founding members and related tax refunds could not be reasonably estimated, and no amounts were recorded.
Network affiliate agreements include minimum revenue guarantees with a maximum potential future payment obligation of $44.1 million. No liability was recorded because management expected the applicable revenue-sharing payments to exceed the guarantees. The company also faces ordinary-course legal claims, which management did not expect to be material.
Key risks include seasonality, cinema attendance and film-release schedules, macroeconomic conditions affecting advertising spending, concentration in founding-member relationships, variable interest rates on the term loan and revolving facility, substantial leverage, related-party transactions and the IRS tax matter. A 100-basis-point change in applicable market rates was estimated to affect annual cash interest expense by approximately $2.8 million.
Important Facts for Investors to Verify
- Reconcile strong operating and Adjusted OIBDA growth with the continuing net loss attributable to NCM, Inc. and significant noncontrolling interests.
- Assess leverage, debt maturities, variable-rate exposure and the effect of the May 2, 2013 refinancing.
- Monitor advertising inventory utilization, CPMs, local advertising growth and theatre attendance trends.
- Evaluate whether new affiliate theatres deliver the projected attendance and advertising impressions.
- Follow the IRS appeals process and any resulting tax-sharing payments or refunds.
- Review the sustainability of quarterly dividends and distributions given negative consolidated equity, debt service and tax-sharing obligations.
- Consider the effect of Fathom’s reduced event activity and the continued wind-down of its Business Events division.