Business Context and Reporting Period
Company: National CineMedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
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 September 30, 2010, NCM, Inc. owned 48.2% of NCM LLC, with the founding members holding the remaining 51.8%.
Key Financial Metrics
| Metric (in millions) | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total Revenue | $125.7 | $95.7 | $309.4 | $262.1 |
| Operating Income | $67.1 | $46.3 | $136.8 | $108.5 |
| Net Income (NCM, Inc.) | $11.8 | $6.6 | $17.6 | $14.9 |
| Diluted EPS | $0.24 | $0.16 | $0.39 | $0.35 |
| Operating Cash Flow (9M) | $100.6 | $101.9 | $100.6 | $101.9 |
| Cash & Equivalents | $55.9 | $85.3 | $55.9 | $85.3 |
| Total Debt (Borrowings) | $757.4 | $803.3 | $757.4 | $803.3 |
| Adjusted OIBDA Margin | 59.2% | 54.1% | 50.7% | 47.3% |
Note: Total Debt includes $725.0 million term loan and $30.0 million revolving credit facility balance as of Sept 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 31.3% in Q3 2010 compared to Q3 2009, driven by a 33.3% increase in advertising revenue and an 8.1% increase in Fathom Events revenue. National advertising revenue grew 38.4% (excluding beverage revenue) due to higher inventory utilization (121.8% vs 96.5%) and favorable TV scatter market conditions.
- Profitability: Operating income rose 44.9% in Q3 2010. Net income attributable to NCM, Inc. increased 78.8% to $11.8 million, primarily due to higher operating income, partially offset by increased income tax provisions and noncontrolling interest allocations.
- Ownership Structure: In Q3 2010, founding members AMC and Regal redeemed 10,955,471 common membership units for NCM, Inc. common stock. This transaction increased NCM, Inc.'s ownership in NCM LLC and resulted in a $83.3 million deferred tax asset and a $40.4 million increase in long-term payable to founding members for tax savings sharing.
- Debt Restructuring: The revolving credit facility was restructured following the Lehman Brothers bankruptcy. Lehman's agency function was transferred to Barclays, and the aggregate revolving credit commitments were reduced to $66.0 million.
- Restatements: The company restated prior period financials (Q3 and 9M 2009) to correct the presentation of income tax provisions related to noncontrolling interests, reducing the tax provision and increasing net income attributable to noncontrolling interests.
Guidance, Outlook, and Risks
- Outlook: Management expects the shift of Kerasotes theatres from an affiliate revenue share structure to the ESA structure to increase operating income by approximately $5.0 million annually. The company anticipates continued growth in advertising revenue due to network expansion and new affiliate additions (e.g., Galaxy, Storyteller, Starplex).
- Dividends: A cash dividend of $0.20 per share was declared on November 4, 2010, payable December 2, 2010. This follows a quarterly dividend of $0.52 per share declared earlier in the year.
- Liquidity: As of September 30, 2010, total liquidity (cash, equivalents, short-term investments, and revolver availability) was $110.6 million. Management believes operating cash flows and revolver availability are sufficient to fund operations, debt service, and dividends for the next 12 months.
- Risks:
- Seasonality: Revenue is seasonal, with Q1 typically lower due to reduced theatre attendance.
- Market Risk: Exposure to interest rate fluctuations on unhedged debt ($255.0 million); a 100 basis point change would impact annual cash interest expense by approximately $2.6 million.
- Concentration: Significant revenue and receivables are tied to founding members and large advertising agencies.
- Contractual Obligations: Minimum revenue guarantees to network affiliates total a maximum potential of $15.2 million.
Key Facts for Investor Verification
- Ownership Change Impact: Verify the long-term impact of the Q3 2010 unit redemption on NCM, Inc.'s net income attribution and the $40.4 million tax sharing liability accretion.
- Debt Covenants: Confirm continued compliance with the consolidated net senior secured leverage ratio (3.4x vs 6.75x limit) and the 50% debt hedging requirement (currently 76% hedged).
- Make-Good Reserve: Monitor the $4.2 million make-good reserve balance, which management expects to recognize as revenue in Q4 2010.
- Intangible Asset Amortization: Track the amortization of the $151.3 million intangible asset recorded for the AMC Kerasotes acquisition and other unit adjustments, estimated at $10.1 million for the next 12 months.
- Related-Party Transactions: Review the volume of theatre access fees and beverage concessionaire revenue from founding members, which constitute a significant portion of operating costs and revenue.