Business Context and Reporting Period
Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: October 1, 2009 (Third Quarter)
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising, Fathom entertainment programming, and corporate events. The company operates under long-term Exhibitor Services Agreements (ESAs) with founding members (AMC, Regal, Cinemark) and network affiliates. As of October 1, 2009, NCM, Inc. owned 41.5% of NCM LLC membership units.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total Revenue | $95.7 | $107.7 | $262.1 | $257.1 |
| Operating Income | $46.3 | $57.2 | $108.5 | $114.0 |
| Net Income (NCM, Inc.) | $6.6 | $10.9 | $14.9 | $14.8 |
| Diluted EPS | $0.16 | $0.26 | $0.35 | $0.35 |
| Adjusted OIBDA | $51.8 | $62.0 | $124.0 | $125.5 |
| Adjusted OIBDA Margin | 54.1% | 57.6% | 47.3% | 48.8% |
| Cash & Equivalents | $85.3 | $44.5 | $85.3 | $44.5 |
| Total Debt (Borrowings) | $804.4 | $803.0 | $804.4 | $803.0 |
| Operating Cash Flow (9M) | $101.9 | $73.6 | $101.9 | $73.6 |
Note: Debt includes $725.0 million term loan and $74.0 million revolving credit facility. Total borrowings on balance sheet are $800.4 million long-term plus $4.0 million current.
Material Changes vs. Prior Period
- Revenue Decline (Q3): Total revenue decreased 11.1% to $95.7 million, driven by a 12.0% drop in advertising revenue. This was caused by a 12.2% decrease in theatre attendance, a 7.1% decrease in CPM (cost per thousand impressions), and reduced content partner spending. Beverage revenue from founding members dropped $3.1 million due to a reduction in purchased ad time (from 90 to 60 seconds).
- Revenue Growth (9M): For the nine-month period, revenue increased 1.9% to $262.1 million, aided by a 7.1% increase in Meetings and Events revenue (Fathom programming) and higher national advertising inventory utilization (81.8% vs 73.6%).
- Net Income Drop (Q3): Net income attributable to NCM, Inc. fell 39.4% to $6.6 million. This was due to lower operating income and a $2.4 million non-cash charge related to the change in fair value of the interest rate swap with Lehman Brothers Special Financing (LBSF).
- Expense Management: Operating expenses decreased 2.2% in Q3 to $49.4 million, primarily due to lower theatre access fees (linked to lower attendance) and reduced advertising operating costs.
Guidance, Outlook, Risks, and Unusual Items
- Lehman Brothers Contingency: NCM has an interest rate swap with LBSF (Lehman subsidiary) covering $137.5 million of debt. Following Lehman's bankruptcy, LBSF is in default. NCM has withheld $5.4 million in swap payments. If the swap is terminated, $137.5 million of debt would become unhedged variable-rate debt. NCM is negotiating a settlement.
- Revolving Credit Facility: The $80 million revolver includes a $20 million commitment from Lehman Commercial Paper Inc. (LCPI). LCPI failed to fund a $6 million request post-bankruptcy. NCM does not expect this to impact liquidity but is not repaying the outstanding $14 million borrowed from LCPI to avoid permanently reducing the facility.
- Dividends: On November 3, 2009, the company declared a cash dividend of $0.16 per share (approx. $6.7 million), payable December 3, 2009.
- Internal Control Weakness: Management concluded disclosure controls were not effective due to a material weakness requiring restatements of Q1 and Q2 2009 equity statements and 2008 minority interest accounting (SFAS 160 and EITF 95-7). Amended filings (10-Q/A and 10-K/A) have been submitted.
- Outlook: Management expects local advertising to remain adversely affected by the economic downturn. However, the company anticipates benefits from a 6% contractual CPM increase for beverage revenue in 2010 and 2011.
Investor Verification Checklist
- Lehman Exposure: Verify the status of the $137.5 million interest rate swap with LBSF and the potential impact on future interest expense if the hedge is terminated.
- Liquidity vs. Debt: Confirm that operating cash flow ($101.9M for 9M) remains sufficient to service the $804.4M debt load and fund mandatory distributions to founding members ($39.0M in Q3) despite the Lehman credit facility uncertainty.
- Restatement Impact: Review the amended 10-Q/A and 10-K/A filings to understand the full financial impact of the accounting restatements regarding noncontrolling interests.
- Revenue Mix: Monitor the trend of "beverage revenue" from founding members, which is contractually fixed but subject to time-reduction clauses, versus national advertising revenue which is more sensitive to economic cycles.
- Attendance Trends: Track theatre attendance figures, as they directly drive both revenue (CPM) and the largest operating expense (theatre access fees).