NCMI

Business Context and Reporting Period

Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: April 1, 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 April 1, 2010, NCM, Inc. owned 40.7% of NCM LLC, with the founding members holding the remaining 59.3%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 15.1% to $84.6 million, driven by a 12.8% increase in advertising revenue and a 25.4% increase in Fathom Events revenue.
• Advertising Performance: National advertising revenue rose 8.5% (excluding beverage revenue) due to improved inventory utilization (78.1% vs. 67.4%) and a 1.7% increase in CPMs. Local advertising revenue surged 35.6% to $12.2 million.
• Operating Expenses: Total operating expenses increased 13.5% to $58.2 million. Notable increases included Fathom Events operating costs (up 27.6%) and selling/marketing costs (up 11.0%), largely correlating with revenue growth.
• Net Income Stability: Despite an 18.9% increase in operating income, Net Income Attributable to NCM, Inc. remained flat at $1.2 million. This was primarily due to a $3.6 million unfavorable change in derivative fair value and increased non-controlling interest allocations.
• Balance Sheet: Cash decreased $8.5 million quarter-over-quarter due to financing activities, including $31.1 million in distributions to founding members and $6.9 million in dividends paid.

Guidance, Outlook, and Risks

• Outlook: Management is cautiously optimistic regarding the macro-economic environment. The company expects yield from recently added network affiliates (approx. 54.2 million new attendees) to be additive to revenue and cash flow in 2010 and 2011.
• Dividends: A cash dividend of $0.18 per share was declared on April 27, 2010, payable June 3, 2010. This follows a quarterly dividend of $0.16 per share paid in the current quarter.
• Liquidity: The company maintains a $80.0 million revolving credit facility and a $725.0 million term loan. The consolidated net senior secured leverage ratio was 4.0 times, well within the 6.75 times covenant limit.
• Risks:
  • Seasonality: First-quarter revenue is historically lower than other quarters.
  • Market Risk: Exposure to interest rate fluctuations on unhedged debt ($255.0 million); a 100 basis point change would impact annual interest expense by approximately $2.6 million.
  • Related Party Dependence: Significant revenue and expense flows are tied to founding members (AMC, Regal, Cinemark) via ESAs and beverage concessionaire agreements.

Investor Verification Checklist

• Non-GAAP Reconciliation: Verify the calculation of Adjusted OIBDA ($32.5 million) and its reconciliation to GAAP Operating Income ($26.4 million), specifically the add-back of share-based compensation ($2.1 million).
• Derivative Impact: Review the $1.7 million loss recorded for the change in derivative fair value and the $60.2 million liability for interest rate swaps, noting the impact on net income.
• Related Party Transactions: Confirm the $12.9 million in theatre access fees paid to founding members and the $9.2 million in revenue received from them under beverage concessionaire agreements.
• Debt Covenants: Validate compliance with the 6.75x leverage ratio covenant and the requirement to hedge 50% of the term loan (currently 76% hedged).
• Restatement Note: Note the restatement of Q1 2009 income tax provision ($2.9 million reduction) due to the treatment of NCM LLC as a pass-through entity, ensuring comparability of year-over-year data.