NCMI

Business Context and Reporting Period

Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2011
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising and Fathom entertainment programming. The company operates under long-term Exhibitor Services Agreements (ESAs) with founding members (AMC, Regal, Cinemark) and network affiliates. As of March 31, 2011, NCM, Inc. owned 48.6% of NCM LLC, with the founding members holding the remaining 51.4%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 16.3% to $70.8 million. This was driven by a 12.8% drop in advertising revenue (due to lower client spending and a 17.6% decrease in available impressions) and a 30.4% drop in Fathom Events revenue (primarily due to a weaker event mix compared to a record-breaking Q1 2010).
• Profitability: Operating income fell 43.2% to $15.0 million. While operating expenses decreased slightly (4.1%), the revenue decline was more significant. NCM, Inc. reported a net loss of $1.0 million compared to net income of $1.2 million in the prior year, largely due to lower operating income and higher noncontrolling interest allocations relative to the parent company's share.
• Cash Position: Cash and cash equivalents decreased by $23.6 million to $50.8 million. This reduction was primarily due to financing activities, including dividend payments of $10.8 million and distributions to founding members of $25.7 million, partially offset by net borrowings of $1.8 million.
• Attendance: Total theater attendance declined 17.7% to 133.2 million attendees, reflecting a weak box office environment in the first quarter.

Outlook, Risks, and Management Commentary

• Guidance: The filing does not provide specific numerical guidance for the full year 2011. Management notes that the first quarter is historically the weakest due to seasonality.
• Network Expansion: Management expects revenue growth from new network affiliates contracted in 2011 (including Consolidated Theatres and Rave Cinemas), which are projected to add nearly 36 million attendees on a full-year pro-forma basis.
• Dividends: On April 26, 2011, the Board declared a cash dividend of $0.20 per share (approx. $10.9 million), payable June 2, 2011. Stockholders also approved an increase in authorized common stock from 120 million to 175 million shares.
• Risks: Key risks include the macro-economic environment affecting advertising spend, seasonality of theater attendance, and the timing of collections on accounts receivable. The company is also in ongoing discussions with founding members regarding a potential restructuring of the Fathom Events business relationship.
• Liquidity: Total liquidity availability stands at $91.8 million, comprising cash, short-term investments, and available revolver capacity. Management believes this is sufficient to fund operations and debt service for the next 12 months.

Investor Verification Checklist

• Revenue Mix: Verify the sustainability of the 12.8% advertising revenue decline and the impact of the "military category" contract loss mentioned in the text.
• Fathom Events: Assess the long-term viability of the Fathom Events segment given the 30.4% revenue drop and ongoing restructuring discussions with founding members.
• Debt Covenants: Confirm continued compliance with the consolidated net senior secured leverage ratio covenant (currently 3.7x vs. 6.5x limit) to ensure no restrictions on future distributions.
• Related Party Transactions: Review the $12.1 million in theatre access fees paid to founding members and the $8.2 million in beverage concessionaire revenue to understand the dependency on these partners.
• Cash Flow vs. Dividends: Monitor the ability to sustain the $0.20 quarterly dividend given the $23.6 million decrease in cash balances and the significant cash outflows for distributions to founding members.