National CineMedia, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. operates North America’s largest digital in-theatre advertising network and provides Fathom Events through long-term exhibitor services agreements with AMC, Regal and Cinemark, plus network-affiliate theatres. The filing covers the unaudited quarter ended March 29, 2012, compared with the quarter ended March 31, 2011. The business is seasonal, with typically lower first-quarter revenue.
- NCM, Inc. owned 48.6% of NCM LLC at quarter-end; founding members held the remaining exchangeable units.
- During the quarter, the Company restructured Fathom Events to emphasize the Fathom Consumer division and began winding down Fathom Business activities.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $79.1 million | $70.8 million | +11.7% |
| Advertising revenue | $66.3 million | $59.1 million | +12.2% |
| Fathom Events revenue | $12.8 million | $11.7 million | +9.4% |
| Operating income | $17.0 million | $15.0 million | +13.3% |
| Operating margin | 21.5% | 21.2% | Improved |
| Adjusted OIBDA | $24.8 million | $23.6 million | +5.1% |
| Adjusted OIBDA margin | 31.4% | 33.3% | Down 1.9 points |
| Net loss attributable to NCM, Inc. | $(0.9) million | $(1.0) million | Improved |
| Basic and diluted loss per share | $(0.02) | $(0.02) | Unchanged |
| Operating cash flow | $(2.5) million | $17.1 million | Decrease |
- National advertising revenue, excluding beverage revenue, increased 19.1% to $45.6 million, while local advertising revenue declined 13.5% to $10.9 million.
- Advertising inventory utilization increased to 76.4% from 71.0%, but national advertising CPM declined 11.5% due to aggressive pricing and a softer scatter market.
- Total theatre attendance increased 26.9% to 169.0 million, while total advertising revenue per attendee decreased 11.7% to $0.392.
- Fathom Consumer revenue increased 21.5%; Fathom Business revenue decreased 15.8% during the wind-down.
- Total assets were $788.5 million and total liabilities were $1.14 billion at March 29, 2012. NCM, Inc. stockholders’ deficit was $436.7 million.
Debt, liquidity and cash flow
- Borrowings totaled $821.0 million at quarter-end, consisting principally of a $550.0 million term loan, $71.0 million outstanding under the revolving facility and $200.0 million of 7.875% senior notes due 2021.
- Cash and cash equivalents were $56.8 million; total cash, cash equivalents and marketable securities were $83.7 million, compared with $98.1 million at December 29, 2011.
- Available revolving capacity was $48.0 million, producing reported total liquidity availability of $131.7 million.
- The Company paid $17.6 million of interest, $4.5 million of income taxes, $12.8 million of dividends and $22.1 million of distributions to founding members during the quarter.
- Cash declined $9.1 million to $56.8 million during the quarter. Investing cash flow was positive $1.6 million, while financing cash flow was negative $8.2 million.
- The senior secured credit facility was in compliance with its covenants. The consolidated net senior secured leverage ratio was 2.8 times versus a 6.5-times covenant.
- The entire $550.0 million term loan was hedged at a fixed rate of 6.484%; the $71.0 million revolver remained exposed to variable interest rates.
Material changes versus the prior comparable period
- Revenue growth was led by national advertising and founding-member beverage revenue, while local advertising declined.
- Operating income increased, but higher interest expense from the 2011 credit-facility amendment and senior-notes issuance limited earnings improvement.
- Adjusted OIBDA increased, but its margin contracted because revenue growth included lower-priced advertising and higher theatre access and other variable costs.
- Operating cash flow changed from $17.1 million provided in Q1 2011 to $2.5 million used in Q1 2012, primarily reflecting timing of receivable collections, income-tax payments and tax-sharing payments.
- The Company issued 651,612 NCM LLC units to founding members for rights to access net new theatre screens and attendees, recording a $9.9 million intangible asset.
Guidance, outlook, risks and unusual items
- Management expects continued network expansion to add approximately 44 million annual attendees and approximately 616 million salable national advertising impressions from theatres added after Q1 2011, including contracted additions.
- Management expects to continue selling 60 seconds of advertising time to founding members under beverage concessionaire arrangements.
- Management believes cash generated from operations and cash on hand will fund working capital, debt service, capital expenditures and other requirements for the next 12 months.
- On April 27, 2012, after quarter-end, NCM LLC issued $400.0 million of 6.00% senior secured notes due 2022. Proceeds were used to repay $325.0 million of term debt, approximately $25.0 million of revolver debt and approximately $40.0 million to terminate related interest-rate swaps.
- The post-quarter debt restructuring extended maturities and increased liquidity, but management projected approximately $6 million of additional interest expense for the remainder of 2012 versus the comparable period.
- The partial swap termination is expected to produce a second-quarter 2012 interest-expense charge of approximately $25 million to $30 million.
- The IRS is examining NCM LLC’s 2007 and 2008 tax returns and issued a 60-Day Letter on April 25, 2012. The Company disputes the proposed adjustments; potential payments under the tax-sharing agreement and related refunds cannot be reasonably estimated.
- Network-affiliate agreements include maximum potential future minimum revenue-guarantee payments of $33.9 million; no liability was recorded because expected revenue shares exceeded the guarantees.
- Key operating risks include macroeconomic advertising demand, scatter-market conditions, pricing and CPM pressure, seasonality, theatre attendance, reliance on founding-member agreements, leverage and interest rates.
Facts investors should verify
- Whether the April 2012 refinancing materially improves liquidity and reduces near-term refinancing risk after considering the swap-termination charge and higher interest expense.
- The effect of lower CPMs and advertising revenue per attendee on future revenue quality and Adjusted OIBDA margins.
- Progress and profitability of the Fathom Consumer strategy following the wind-down of Fathom Business.
- The outcome and financial consequences of the IRS examinations and proposed tax adjustments.
- Compliance with debt covenants, revolver availability and the Company’s ability to sustain dividends and required founding-member distributions.
- Whether projected theatre additions translate into the stated attendance, advertising-impression and cash-flow opportunities.