National CineMedia, Inc. — 2011 Q2 Form 10-Q Summary
Business context and reporting period
National CineMedia operates a digital in-theatre advertising and events network through National CineMedia, LLC. Its principal businesses are advertising and Fathom Consumer and Business Events, supported by long-term exhibitor services agreements with AMC, Regal and Cinemark and agreements with other theatre affiliates. The unaudited report covers the quarter and six months ended June 30, 2011, compared with the quarter and six months ended July 1, 2010. Results are seasonal, and interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $114.0 million | $99.1 million | $184.8 million | $183.7 million |
| Advertising revenue | $98.6 million | $90.1 million | $157.7 million | $157.9 million |
| Fathom Events revenue | $15.4 million | $8.9 million | $27.1 million | $25.7 million |
| Operating income | $50.2 million | $43.3 million | $65.2 million | $69.7 million |
| Net income attributable to NCM, Inc. | $9.0 million | $4.6 million | $8.0 million | $5.8 million |
| Diluted earnings per share | $0.16 | $0.11 | $0.15 | $0.14 |
| Adjusted OIBDA | $57.7 million | $49.9 million | $81.3 million | $82.4 million |
| Adjusted OIBDA margin | 50.6% | 50.4% | 44.0% | 44.9% |
| Cash flow from operations | Not separately provided | Not separately provided | $52.2 million | $36.4 million |
Q2 operating margin was approximately 44.0%, compared with approximately 43.7% in the prior-year quarter. Six-month operating margin was approximately 35.3%, compared with approximately 38.0%. Q2 revenue increased 15.0%, while six-month revenue increased 0.6%. Q2 net income attributable to NCM, Inc. increased 95.7%; the six-month increase was 37.9%.
At June 30, 2011, cash and cash equivalents were $56.5 million, short-term investments were $7.9 million and total liquidity, including $45.0 million of revolver availability, was $109.4 million. Cash, cash equivalents and short-term investments declined from $82.9 million at December 30, 2010. Net cash used in investing activities was $6.1 million and net cash used in financing activities was $64.0 million for the six months.
At June 30, 2011, borrowings were $760.0 million, consisting of a $725.0 million term loan and $35.0 million drawn on the revolver. The reported consolidated net senior secured leverage ratio was 3.5 times against a 6.5-times covenant. Interest rate swaps hedged $550.0 million of the $725.0 million term loan at a fixed rate of 6.484%. Total interest rate swap liabilities were $71.4 million.
Material changes versus the prior comparable period
- Q2 advertising revenue increased 9.4%, driven by higher national and local sales, while Fathom Events revenue increased 73.0%.
- National advertising revenue excluding beverage revenue increased 5.6% in Q2, but declined 4.1% for the first six months because of a significant military advertising contract in the prior-year first quarter that did not recur.
- Local advertising revenue increased 23.2% in Q2 and 14.7% for the first six months. Total advertising revenue per attendee increased to $0.56 in Q2 from $0.55 and to $0.51 for the first six months from $0.48.
- Theatre attendance increased 6.4% in Q2 but declined 5.6% for the first six months. National inventory utilization was 91.5% in Q2 and 82.8% for the first six months, compared with 85.4% for the comparable six-month period.
- Operating expenses increased 14.3% in Q2 and 4.9% for the first six months, primarily reflecting higher Fathom-related costs, selling and marketing expenses, personnel costs and share-based compensation.
- Six-month operating income declined $4.5 million, despite slightly higher revenue, while the non-cash derivative fair-value charge declined to $0.8 million from $6.2 million. This reduction materially benefited reported net income.
- During the first quarter, founding members returned 322,751 NCM LLC units, reducing an intangible asset by $5.5 million. Amortization of the intangible asset associated with Regal Consolidated Theatres was scheduled to begin in Q3 2011.
Guidance, outlook, risks and unusual items
Management stated that operating cash flow and cash on hand should be sufficient for working capital, debt service, capital expenditures and other investing needs over the next 12 months. The company expected new or recently added theatre affiliates to contribute nearly 47 million annual attendees and up to 650 million additional salable national advertising impressions once integrated.
On July 5, 2011, after quarter-end, NCM LLC issued $200 million of 7.875% senior notes due 2021. Proceeds were used to prepay $175 million of term debt, repay revolver borrowings and pay offering costs. The credit facility was amended to replace the existing revolving facility with a $105 million facility maturing December 31, 2014; a separate $14 million Lehman-related revolving loan also remained outstanding, for stated total revolver availability of approximately $119 million. Management expected the refinancing to extend maturities and increase liquidity, but estimated that higher borrowing rates would increase second-half 2011 interest expense by approximately $5.8 million versus the second half of 2010.
Management was discussing a possible restructuring of the Fathom Events relationship with the founding members, but stated that no outcome was known. Key risks include advertising spending and collection timing, theatre attendance, seasonal fluctuations, national inventory utilization, dependence on founding members and related-party agreements, leverage and interest-rate exposure, and the slow economic recovery affecting Fathom Business Events. Minimum future payments under network affiliate revenue guarantees could reach $18.3 million; no liability was recorded because expected revenue shares exceeded the guaranteed amounts. The company reported no material pending litigation or material changes to previously disclosed risk factors.
Facts investors should verify
- Reconcile the post-quarter-end debt refinancing, including the $200 million notes, $175 million term-loan prepayment, revised revolver capacity and resulting interest expense.
- Assess whether the first-half weakness in national advertising, lower inventory utilization and attendance trends persisted after June 30, 2011.
- Monitor the effect of additional theatre affiliates and expected advertising impressions on revenue, margins and cash flow.
- Evaluate the sustainability of dividends and required distributions to founding members given leverage, tax-sharing obligations and seasonal cash flows.
- Review the proposed or potential restructuring of the Fathom Events relationship and its effect on revenue sharing and operating costs.
- Distinguish GAAP operating income and net income from management’s non-GAAP Adjusted OIBDA, which excludes depreciation, amortization and share-based compensation.