National CineMedia, Inc. — Form 10-Q Summary
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, as well as network-affiliate agreements. The filing covers the quarter and six months ended June 28, 2012; comparative periods ended June 30, 2011. Financial statements are unaudited and results are seasonal.
Financial Performance and Position
| Metric | Quarter Ended June 28, 2012 | Prior Year Quarter | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenue | $110.1 million | $114.0 million | $189.2 million | $184.8 million |
| Advertising revenue | $101.3 million | $98.6 million | $167.6 million | $157.7 million |
| Fathom Events revenue | $8.8 million | $15.4 million | $21.6 million | $27.1 million |
| Operating income | $45.3 million | $50.2 million | $62.3 million | $65.2 million |
| Adjusted OIBDA | $53.0 million | $57.7 million | $77.8 million | $81.3 million |
| Adjusted OIBDA margin | 48.1% | 50.6% | 41.1% | 44.0% |
| Net income attributable to NCM, Inc. | $(1.9) million | $9.0 million | $(2.8) million | $8.0 million |
| Basic EPS | $(0.03) | $0.17 | $(0.05) | $0.15 |
- Quarterly revenue decreased 3.4%, while six-month revenue increased 2.4%. Advertising growth was offset by lower Fathom Events revenue.
- Quarterly advertising revenue increased 2.7%; national advertising excluding beverage revenue increased 6.2%, supported by a 2.5% increase in CPMs. Local advertising revenue declined 4.5%.
- Fathom Events revenue declined 42.9% in the quarter and 20.3% for the six months, reflecting the wind-down of Fathom Business Events and weaker Consumer Events performance.
- Operating expenses increased 1.6% for the quarter and 6.1% for the six months. Theatre access fees increased due to contractual rate increases, higher per-patron fees and expanded digital-screen access.
- Net loss was driven primarily by a $26.7 million loss on termination of interest-rate swaps, higher interest expense and a $2.5 million write-off of deferred debt issuance costs.
- Cash and cash equivalents were $48.1 million at June 28, 2012, compared with $65.9 million at December 29, 2011. Short-term marketable securities were $26.5 million, producing cash and short-term securities of $74.6 million.
- Six-month operating cash flow was $(5.1) million, compared with $52.2 million in the prior-year period. Investing cash flow was $(0.5) million and financing cash flow was $(12.2) million.
- Total assets were $794.2 million and total liabilities were $1.1487 billion. NCM, Inc. stockholders’ deficit was $439.5 million; consolidated equity deficit was $354.5 million.
Material Changes Versus the Prior Comparable Period
- Advertising performance improved, but Fathom Events revenue fell substantially following the restructuring and wind-down of Fathom Business Events.
- Network expansion increased affiliate screens to 20.0% of total network screens from 15.7% and added nine affiliates with 863 screens since the prior-year first half.
- Advertising inventory utilization was 90.3% in the quarter versus 91.5% in the prior-year quarter; first-half utilization improved to 83.6% from 82.8%.
- The company completed a debt restructuring on April 27, 2012, issuing $400.0 million of 6.00% Senior Secured Notes due 2022 and using proceeds to repay $325.0 million of term loans, approximately $25.0 million of revolver borrowings and $40.2 million to terminate related swaps.
- Total borrowings increased to $839.0 million from $794.0 million. Debt consisted of a $14.0 million revolver balance, $225.0 million term loan, $200.0 million of 7.875% Senior Unsecured Notes due 2021 and $400.0 million of 6.00% Senior Secured Notes due 2022.
- Borrowing maturities were extended, and available liquidity increased to $179.6 million, consisting of $74.6 million of cash and short-term securities plus $105.0 million of revolver availability.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance in the filing. It expected network additions contracted through the third quarter of 2012 to add approximately 32 million annual attendees and approximately 448 million salable national advertising impressions on a full-year pro forma basis.
- Management expects to continue selling 60 seconds of advertising time to founding members during the remainder of 2012 and expects future funds from operations and cash on hand to fund working capital, debt service and capital expenditures for the next 12 months.
- The business is exposed to advertising-market conditions, macroeconomic uncertainty, client spending timing, theatre attendance, film slate quality, seasonal fluctuations and Fathom event performance.
- The company pays theatre access fees under agreements that include annual 5% per-digital-screen increases, an 8% per-patron increase beginning in 2012 and a minimum aggregate fee equal to 12% of defined advertising revenue.
- IRS examinations of NCM LLC’s 2007 and 2008 tax returns remain unresolved. The IRS proposed adjustments concerning cash received by founding members around the IPO. The company contested the position and stated that potential payments under the tax-sharing agreement and related refunds could not be reasonably estimated; no amounts were recorded.
- Network-affiliate agreements contain minimum revenue guarantees with a maximum potential future payment obligation of $31.4 million. No liability was recorded because expected revenue-share payments exceeded the guarantees.
- The filing reported a $26.7 million swap-termination loss, a $40.2 million cash payment for swap terminations and a $2.5 million debt-issuance-cost write-off as significant unusual items.
- The company declared a $0.22-per-share cash dividend, approximately $12.0 million, payable August 30, 2012.
Important Facts for Investors to Verify
- Reconcile the reported net loss and cash-flow decline with the nonrecurring swap termination payment and debt restructuring costs.
- Assess whether advertising growth, pricing and network expansion can offset continued weakness in Fathom Events and local advertising.
- Review debt maturities, covenant requirements and the company’s 2.9x net senior secured leverage ratio versus the 6.5x covenant limit.
- Evaluate liquidity after mandatory distributions to founding members, tax-sharing payments, interest, debt service and shareholder dividends.
- Monitor the unresolved IRS examinations and any resulting tax-sharing payments or refunds.
- Consider the significance of related-party revenue, theatre access fees and other transactions with AMC, Regal and Cinemark when evaluating operating economics.