National CineMedia, Inc. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 27, 2012. The filing is an annual report; fourth-quarter 2012 results are included in the annual and unaudited quarterly data. NCM, Inc. is a holding company that owns approximately 48.6% of National CineMedia, LLC, which operates the cinema advertising and Fathom Events businesses. The remaining 51.4% of NCM LLC is owned by AMC, Cinemark and Regal.
Business Context
- NCM operates a large North American digital in-theatre media network selling advertising, lobby and online/mobile promotions, and Fathom Events.
- Advertising represented 91.2% of FY2012 revenue; Fathom Events represented 8.8%.
- At year-end, the network included 1,529 theatres, 19,359 total screens, 18,491 digital screens and approximately 690.4 million annual attendees.
- Founding-member theatres represented approximately 80% of network screens and 84% of attendance, creating substantial dependence on the AMC, Cinemark and Regal ESAs.
Financial Performance and Key Metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total revenue | $448.8 million | $435.4 million | Up 3.1% |
| Advertising revenue | $409.5 million | $386.2 million | Up 6.0% |
| Fathom Events revenue | $39.3 million | $49.2 million | Down 20.1% |
| Operating income | $191.8 million | $193.7 million | Down 1.0% |
| Consolidated net income | $65.3 million | $100.6 million | Down 35.1% |
| Net income attributable to NCM, Inc. | $13.4 million | $31.5 million | Down 57.5% |
| Diluted EPS | $0.24 | $0.58 | Down $0.34 |
| Adjusted OIBDA | $221.2 million | $224.3 million | Down 1.4% |
| Adjusted OIBDA margin | 49.3% | 51.5% | Down 2.2 points |
| Operating cash flow | $81.6 million | $161.8 million | Down $80.2 million |
| Capital expenditures | $10.4 million | $13.7 million | Down $3.3 million |
Advertising growth was driven primarily by a 7.9% increase in national advertising excluding beverage revenue, higher attendance and growth in online/mobile and branded-content revenue. National inventory utilization declined to 98.8% from 100.3%, while national advertising CPMs excluding beverage revenue declined 2.5%. Local advertising revenue increased only 0.6%.
Fourth-Quarter 2012
| Metric | Q4 2012 | Q4 2011 |
|---|---|---|
| Revenue | $115.9 million | $114.6 million |
| Operating income | $51.4 million | $54.5 million |
| Net income attributable to NCM, Inc. | $(0.5) million | $6.7 million |
| Basic EPS | $(0.01) | $0.12 |
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and marketable securities totaled $106.6 million at year-end, compared with $98.1 million in 2011. NCM, Inc. separately reported cash and marketable securities of $96.2 million.
- Total liquidity, including $110.0 million of revolving-credit availability, was $216.6 million.
- Total borrowings were $879.0 million, consisting of $14.0 million outstanding under the revolving facility, a $265.0 million term loan, $200.0 million of 7.875% senior unsecured notes due 2021 and $400.0 million of 6.00% senior secured notes due 2022.
- The consolidated net senior secured leverage ratio was 3.1 times versus a 6.5-times covenant threshold. Management stated that operating cash flow and cash on hand should fund working capital, debt service and capital requirements for the next 12 months.
- Cash interest paid was $50.7 million. A 100-basis-point change in rates on the variable-rate term loan and revolver would affect annual cash interest expense by approximately $2.8 million.
- NCM LLC distributed $149.6 million of available cash to its members, including $72.8 million to NCM, Inc. FY2012 dividends declared were $0.88 per share, or approximately $49.0 million in total.
Material Changes Versus FY2011
- Advertising revenue increased $23.3 million, but Fathom Events revenue declined $9.9 million.
- Fathom Business Events was wound down during the first quarter of 2012, shifting strategic focus to Fathom Consumer Events. Fathom held 90 event nights versus 104 in 2011, while attendance increased 3.6% to approximately 2.2 million patrons.
- Theatre access fees increased 16.4% to $64.5 million, reflecting contractual escalators, higher founding-member attendance and fees for access to digital cinema equipment.
- Operating expenses increased 6.3% to $257.0 million, outpacing revenue growth and contributing to lower operating income and margins.
- Interest on borrowings increased to $56.7 million from $49.2 million due to the company’s expanded debt structure.
- The company recorded a $26.7 million loss on termination of interest-rate swaps and paid approximately $63.4 million in swap termination amounts. These items materially reduced operating cash flow and net income.
- Income tax expense increased to $26.7 million, including approximately $9.6 million attributable to prior-period adjustments related to deferred tax assets and the tax receivable agreement.
Outlook, Guidance and Unusual Items
- Management expected FY2013 capital expenditures of approximately $11.0 million to $13.0 million, primarily for software, inventory-management systems, websites, mobile applications and network-affiliate equipment.
- New affiliate theatres added during 2012 and early 2013 were expected to contribute approximately 25 million full-year attendees and approximately 350 million salable national advertising impressions.
- National advertising commitments booked entering 2013 were approximately 4% higher than entering 2012.
- Management expected 2013 cash interest expense to decrease by approximately $3.5 million from 2012 before amortization of other comprehensive income, following debt refinancing and maturity extensions.
- The IRS was examining NCM LLC’s 2007 and 2008 tax returns. The company disputed the proposed adjustments and stated that any potential payments under the tax receivable agreement and related tax refunds could not be reasonably estimated.
- The filing identifies material risks from advertising demand and pricing pressure, theatre attendance, competition, technology failures, customer concentration, reliance on founding-member ESAs, founding-member financial condition, leverage, interest-rate changes and restrictions on distributions.
- The company’s CFO, Gary W. Ferrera, notified the company on January 9, 2013 that he intended to resign effective March 1, 2013; a replacement search was underway.
Most Important Facts to Verify
- Whether advertising CPM pressure and lower inventory utilization continued after FY2012.
- Progress in monetizing newly added affiliate theatres and the expected 2013 attendance and impression contribution.
- Fathom Consumer Events revenue, attendance, event economics and the effects of discontinuing most Business Events activity.
- Debt refinancing, variable-rate exposure, covenant compliance and the company’s ability to sustain distributions and dividends.
- Resolution and financial impact of the IRS examination and related tax receivable agreement obligations.
- Renewal, enforceability and economics of the long-term ESAs with AMC, Cinemark and Regal.
- The impact of the CFO transition and any subsequent changes in management, guidance or capital-allocation policy.