Business Context and Reporting Period
Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended July 2, 2009
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising, business meetings, and entertainment events (Fathom) via long-term agreements with founding members (AMC, Regal, Cinemark) and network affiliates.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | YTD 2009 | Q2 2008 | YTD 2008 |
|---|---|---|---|---|
| Total Revenue | $92.9 | $166.4 | $86.7 | $149.4 |
| Operating Income | $39.9 | $62.1 | $39.1 | $56.8 |
| Net Income (NCM, Inc.) | $7.1 | $8.3 | $4.3 | $3.9 |
| Earnings Per Share (Diluted) | $0.17 | $0.20 | $0.10 | $0.09 |
| Adjusted OIBDA | $45.3 | $72.2 | $42.8 | $63.5 |
| Adjusted OIBDA Margin | 48.8% | 43.4% | 49.4% | 42.5% |
| Cash and Equivalents | $61.6 | $61.6 | $18.1 | $18.1 |
| Total Debt (Borrowings) | $805.2 | $805.2 | $801.0 | $801.0 |
Note: Total Debt includes $725.0 million term loan and $74.0 million revolving credit facility. Cash flow from operations for YTD 2009 was $49.2 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.2% in Q2 2009 and 11.4% YTD 2009 compared to 2008. This was driven by an 11.6% increase in advertising revenue, primarily due to higher national inventory utilization (81.3% in Q2 2009 vs. 66.2% in Q2 2008) and the integration of AMC Loews theatres.
- Segment Performance: While national advertising revenue grew significantly, local advertising revenue declined 6.1% in Q2 2009 due to economic conditions. Meetings and Events revenue decreased 21.0% in Q2 2009 due to the timing of Metropolitan Opera events and corporate event delays.
- Profitability: Net income attributable to NCM, Inc. increased 65.1% in Q2 2009. This was aided by a $4.5 million non-cash credit to interest expense resulting from the change in fair value of interest rate swaps following the Lehman Brothers bankruptcy.
- Operating Expenses: Total operating expenses rose 11.3% in Q2 2009, driven by higher theatre access fees (due to increased attendance and screen rates) and increased network costs.
Outlook, Risks, and Management Commentary
- Lehman Brothers Exposure: NCM has a $20.0 million commitment with Lehman Commercial Paper Inc. (LCPI) within its revolving credit facility. LCPI failed to fund a $6.0 million request post-bankruptcy. NCM does not anticipate LCPI will fulfill future commitments but believes this will not materially impact liquidity. Additionally, a $137.5 million interest rate swap with Lehman is in default; NCM has withheld $3.9 million in payments.
- Dividends: On August 4, 2009, the company declared a cash dividend of $0.16 per share (approx. $6.8 million), payable September 3, 2009.
- Economic Environment: Management notes that the challenging macro-economic environment presents uncertainty regarding advertising spending and receivable collections, particularly affecting local advertising.
- Strategic Transactions: NCM completed a restructuring of IdeaCast, acquiring its assets and transferring the interest to Danoo, Inc. in exchange for an equity stake (approx. 27% of Danoo).
- Liquidity: Management believes cash on hand and operating cash flows are sufficient to fund operations, debt service, and capital expenditures for the next 12 months.
Investor Verification Checklist
- Lehman Default Status: Verify the resolution status of the $137.5 million interest rate swap with Lehman Brothers Special Financing and the $6.0 million unfunded revolver commitment.
- Local Ad Trends: Monitor the trajectory of local advertising revenue, which has declined due to economic headwinds, to assess if the downturn is stabilizing.
- Debt Covenants: Confirm continued compliance with the consolidated net senior secured leverage ratio covenant (currently 3.8x vs. 7.0x limit).
- Noncontrolling Interest: Review the impact of noncontrolling interests (founding members) on net income attributable to NCM, Inc., which increased due to higher operating income and additional unit issuances.
- Integration Payments: Track the run-out of integration payments from AMC Loews and Regal Consolidated Theatres, which affect Adjusted OIBDA calculations for covenant compliance.