National CineMedia, Inc. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that manages National CineMedia, LLC, which operates a large digital in-theatre advertising and entertainment-events network. NCM, Inc. owned approximately 48.7% of NCM LLC at December 29, 2011; AMC, Cinemark and Regal owned the remainder. The filing covers the 52-week fiscal year ended December 29, 2011, including fourth-quarter results.
- Advertising represented 88.7% of fiscal 2011 revenue; Fathom Events represented 11.3%.
- The network included 18,670 total screens, including 17,698 digital screens, across 1,480 theatres and 47 states plus the District of Columbia.
- Fiscal 2011 network attendance was approximately 636.8 million, essentially flat with 2010.
Financial performance and key metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $435.4 million | $427.5 million | +1.8% |
| Advertising revenue | $386.1 million | $379.4 million | +1.8% |
| Fathom Events revenue | $49.2 million | $48.0 million | +2.5% |
| Operating income | $193.7 million | $190.6 million | +1.6% |
| Consolidated net income | $100.6 million | $109.1 million | Down |
| Net income attributable to NCM, Inc. | $31.5 million | $29.2 million | +7.9% |
| Diluted EPS | $0.58 | $0.62 | Down |
| Adjusted OIBDA | $224.3 million | $222.4 million | +0.9% |
| Adjusted OIBDA margin | 51.5% | 52.0% | Down 50 bps |
| Operating cash flow | $161.8 million | $143.7 million | +12.6% |
| Capital expenditures | $13.7 million | $10.4 million | Up |
Revenue growth was driven principally by local advertising, which increased 14.7% to $80.6 million, and higher Fathom Consumer activity. National advertising revenue declined 1.2% to $305.5 million, including $38.0 million of beverage-related revenue. National advertising excluding beverage revenue declined 1.6% to $267.5 million as television upfront strength, weaker economic conditions and lower military-client spending reduced demand and inventory utilization.
Fathom Consumer revenue increased 11.1%, while Fathom Business revenue declined 13.9% to $14.2 million. Advertising revenue per attendee increased 1.8% to $0.606. Fourth-quarter revenue was $114.6 million, compared with $118.1 million in the fourth quarter of 2010; fourth-quarter net income attributable to NCM, Inc. was $6.7 million, compared with $11.6 million.
Liquidity, debt and balance sheet
- Cash, cash equivalents and marketable securities totaled $98.1 million at year-end, compared with $82.9 million in 2010.
- Management reported total liquidity of $173.1 million, consisting of cash and securities plus $75.0 million of revolving-credit availability.
- Total borrowings were $794.0 million: $550.0 million under the term loan, $44.0 million under the revolver and $200.0 million of 7.875% senior unsecured notes due 2021.
- The term loan was hedged at a fixed rate of 6.484%; the revolver had a weighted-average rate of 2.01%.
- The consolidated net senior secured leverage ratio was 2.7x versus a 6.5x covenant limit, and the company stated it was in compliance with its debt covenants.
- Total assets were $820.2 million and total liabilities were $1.167 billion, producing a consolidated equity deficit of $346.8 million.
- Cash flow from operations was $161.8 million; investing cash flow was negative $53.1 million and financing cash flow was negative $117.2 million.
Material changes versus the prior comparable period
- In July 2011, NCM LLC issued $200.0 million of 7.875% senior notes due 2021, prepaid $175.0 million of term debt and repaid $21.0 million on the revolver. Revolving availability increased to $119.0 million and maturity was extended to December 31, 2014.
- Interest expense increased by $4.8 million, primarily because of the new senior notes and related financing costs. The company expects approximately $7.1 million of additional interest expense in 2012 versus 2011.
- Digital cinema projector deployment expanded to approximately 10,371 screens from 2,487, while total digital network screens increased 10.6% to 17,698.
- Fathom Events was restructured in early 2012 to emphasize Fathom Consumer and reduce focus on Fathom Business.
- Capital expenditures increased to $13.7 million, including $4.4 million for network-affiliate additions.
- Quarterly dividends increased from $0.72 per share in 2010 to $0.84 per share in 2011.
Guidance, outlook, management commentary, risks and unusual items
- Management expected 2012 capital expenditures of approximately $10.0 million to $12.0 million, excluding potential additional network-affiliate investments.
- Contracted theatre additions were expected to add approximately 57 million attendees on a full-year pro forma basis and approximately 800 million salable national advertising impressions.
- The company expected the Fathom Business restructuring to have no material adverse effect on future operating income or Adjusted OIBDA because associated direct and indirect costs would also decline.
- The company expected access fees to increase in 2012, including an 8% increase in the per-attendee rate beginning in 2012 and annual 5% increases in the per-digital-screen rate.
- Unusual 2011 items included a $6.7 million impairment of the RMG investment, a $1.5 million non-cash write-off of deferred loan fees and a $1.3 million non-cash derivative fair-value charge.
- The IRS was examining NCM LLC’s 2007 and 2008 tax returns. A 2007 Notice of Proposed Adjustment primarily concerned the characterization of cash received by founding members around the IPO. The company disputed the IRS position; the potential financial impact was not clearly quantifiable.
- The tax receivable agreement requires payments to founding members equal to 90% of specified realized tax benefits. The company estimated 2012 payments of $20.6 million for the 2011 tax year and $1.0 million for the 2010 tax year.
- Key risks include dependence on long-term exhibitor services agreements and founding-member support, theatre attendance and film performance, advertising-market volatility, competition from television and digital media, technology failures, substantial leverage, related-party conflicts and potential dilution from exchangeable NCM LLC units.
Most important facts for an investor to verify
- Whether national advertising demand and inventory utilization recover after the 2011 slowdown, and whether local advertising growth can offset national weakness.
- The effect of higher interest expense and the 2014 revolver maturity on future free cash flow and dividends.
- Progress and economics of the digital-cinema rollout and newly added affiliate theatres.
- The outcome of the IRS examinations and the timing and amount of tax receivable agreement payments.
- The sustainability of the 51.5% Adjusted OIBDA margin, noting that Adjusted OIBDA is a non-GAAP measure.
- The renewal and enforceability of the ESAs, particularly because founding-member theatres represented approximately 82% of network screens and 87% of attendance.