NCMI

Business Context and Reporting Period

Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 26, 2008
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising, business meetings (CineMeetings), and entertainment programming (Fathom events). The company operates under long-term Exhibitor Services Agreements (ESAs) with founding members (AMC, Regal, Cinemark) and network affiliates.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3.6% quarter-over-quarter (Q2 2008 vs. Q2 2007) and 6.9% year-to-date compared to the combined 2007 pre- and post-IPO periods. Growth was driven by a 70% increase in meetings and events revenue and a 4.5% increase in local advertising revenue.
• Advertising Performance: National advertising revenue decreased 4.3% in Q2 2008 due to lower inventory utilization (66.2% vs. 80.8% in Q2 2007) and a reduction in beverage concessionaire advertising time. However, Cost Per Mille (CPM) increased 12.5% (excluding beverage revenue).
• Expense Increases: Total operating expenses rose 19.9% in Q2 2008. Significant drivers included an 87.2% increase in meetings and events operating costs (due to a >100% increase in event count) and a 72.7% increase in advertising operating costs (due to network expansion).
• Profitability: Net income decreased 31.7% in Q2 2008 compared to Q2 2007. This was primarily due to lower operating income, partially offset by lower net interest expense. A one-time adjustment to deferred tax accounts due to a Colorado tax law change increased the effective tax rate for the period.
• Intangible Assets: The company recorded $116.1 million in new intangible assets during the first half of 2008 related to exclusive access rights for new theatres added by founding members (AMC/Loews and Regal/Consolidated Theatres).

Guidance, Outlook, Risks, and Unusual Items

• Dividends: On July 29, 2008, the company declared a cash dividend of $0.16 per share (approx. $6.8 million), payable September 4, 2008.
• Liquidity: Total liquidity (cash + undrawn credit line) was $51.1 million as of June 26, 2008. The company maintains a senior secured credit facility with $80.0 million capacity; $47.0 million was outstanding at period end.
• Seasonality: Results are seasonal, with higher revenues typically occurring in Q2, Q3, and Q4 due to film release cycles and marketing expenditures. Q1 is historically weaker.
• Guarantees: The company has a put obligation related to up to $10 million of IdeaCast debt (recorded liability of $2.4 million) and minimum revenue guarantees for network affiliates with a maximum potential payment of $21.6 million.
• Tax Law Change: A Colorado state tax law change enacted in Q2 2008 will reduce the applicable tax rate effective January 1, 2009. The Q2 2008 results included a one-time adjustment reflecting this future lower rate.
• Market Risk: Primary exposure is interest rate risk. The company has hedged $550.0 million of its $725.0 million term loan at a fixed rate of 6.734%.

Investor Verification Checklist

• Revenue Mix: Verify the sustainability of the 70% growth in meetings and events revenue and whether it offsets the decline in national advertising utilization.
• Debt Service: Confirm the company's ability to meet mandatory distributions to founding members ($27.2 million in Q2) and interest payments on $772 million of debt given the current cash flow.
• Intangible Amortization: Monitor the impact of the $116.1 million in new intangible assets on future depreciation and amortization expenses, estimated at $2.0 million annually for the next five years.
• Related Party Transactions: Review the terms of the Exhibitor Services Agreements (ESAs) with founding members (AMC, Regal, Cinemark), which control theatre access fees and revenue sharing.
• Colorado Tax Impact: Assess the timing and magnitude of the benefit from the Colorado tax rate reduction effective January 1, 2009.