Business Context and Reporting Period
Company: National CineMedia, Inc. (NCM, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 30, 2010
Business Overview: NCM, Inc. is a holding company that manages National CineMedia, LLC (NCM LLC), the operator of the largest digital in-theatre media network in North America. The company sells advertising (88.7% of revenue) and distributes entertainment programming via its Fathom Events division (11.3% of revenue). NCM LLC operates under long-term Exhibitor Services Agreements (ESAs) with three founding members: AMC, Cinemark, and Regal, which collectively own 51.7% of NCM LLC. NCM, Inc. owns 48.3% of NCM LLC.
Key Financial Metrics
| Metric | 2010 (in millions) | 2009 (in millions) |
|---|---|---|
| Total Revenue | $427.5 | $380.7 |
| Operating Income | $190.6 | $168.2 |
| Net Income (NCM, Inc.) | $29.2 | $26.1 |
| Adjusted OIBDA | $222.4 | $189.3 |
| Adjusted OIBDA Margin | 52.0% | 49.7% |
| Cash and Cash Equivalents | $74.4 | $91.1 |
| Total Debt (Borrowings) | $775.0 | $799.0 |
| Capital Expenditures | $10.4 | $8.6 |
| Dividends Declared per Share | $0.72 | $0.64 |
Note: Adjusted OIBDA is a non-GAAP measure defined as Operating Income plus Depreciation and Amortization, excluding share-based compensation and severance costs.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.3% to $427.5 million, driven by a 13.2% increase in advertising revenue and a 5.5% increase in Fathom Events revenue.
- Advertising Performance: National advertising revenue (excluding beverage revenue) rose 14.8% due to expanded client base and higher inventory utilization (101.5% vs. 87.5% in 2009). This offset a 4.5% decrease in total theatre attendance (637.4 million vs. 667.2 million).
- CPM Increases: National advertising CPMs increased 5.7% (excluding beverage revenue), reflecting a favorable TV advertising scatter market.
- Network Expansion: The network added 86 theatres with 826 screens in 2010. Additionally, the acquisition of Kerasotes by AMC and Regal shifted screens from affiliate agreements to the long-term ESA structure, extending contract terms.
- Ownership Changes: In Q3 2010, AMC and Regal redeemed 10.96 million common membership units for NCM, Inc. common stock, increasing NCM, Inc.'s ownership in NCM LLC to 48.3%.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2011 Expectations: Management expects network attendance to increase by approximately 32 million attendees in 2011 due to the integration of Consolidated Theatres and Rave Cinemas screens (approx. 874 screens) in mid-2011.
- Capital Expenditures: Expected to be between $10.0 million and $12.0 million in 2011, primarily for digital content system upgrades and network equipment for new affiliates.
- Dividend Policy: The company intends to distribute a substantial portion of free cash flow as dividends. A dividend of $0.20 per share was declared in January 2011.
- Strategic Focus: Continued expansion of geographic coverage, increasing national CPMs, and growing the Fathom Events business through 3D capabilities and live broadcasts.
Risks and Contingencies
- Dependence on Founding Members: Approximately 87% of screens and 89% of attendance are from founding members (AMC, Cinemark, Regal). Termination or non-renewal of ESAs would have a material adverse effect.
- Debt Obligations: NCM LLC has a $725 million term loan and a $50 million revolving credit facility. Covenants require maintaining specific leverage ratios and hedging 50% of the term loan at a fixed rate.
- Make-Good Reserve: A $2.8 million reserve was established in Q4 2010 due to under-delivery of film advertising contracts related to lower-than-anticipated attendance in PG-13 and R-rated categories.
- Tax Receivable Agreement: The company must pay 90% of tax savings realized from basis adjustments to founding members. Estimated payments for 2011 include $20.0 million for the 2010 taxable year.
Investor Verification Checklist
- Attendance Trends: Verify the impact of the 4.5% decline in 2010 theatre attendance on future revenue projections and the success of the 2011 network expansions (Consolidated/Rave).
- Debt Covenants: Confirm continued compliance with the senior secured credit facility leverage ratio (3.5x at year-end vs. 6.75x covenant) and interest rate hedge requirements.
- Make-Good Liability: Monitor the utilization of the $2.8 million make-good reserve in Q1 2011 and its impact on reported revenue.
- Founding Member Relations: Assess the status of preliminary discussions regarding the restructuring of the Fathom Events business relationship with founding members.
- Tax Payments: Track the actual cash outflows related to the Tax Receivable Agreement, specifically the estimated $21.6 million payable in 2011.