National CineMedia, Inc. — Form 10-Q Summary
Business Context and Reporting Period
National CineMedia operates a North American digital in-theatre advertising network and Fathom Events business through National CineMedia, LLC. Its principal revenue source is advertising sold under long-term exhibitor services agreements with AMC, Regal and Cinemark, together with network affiliate agreements. The filing covers the quarter and nine months ended September 27, 2012, compared with September 29, 2011. Results are seasonal and interim performance may not indicate full-year results.
Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $143.7 million | $136.0 million | $332.9 million | $320.8 million |
| Advertising revenue | $138.0 million | $127.2 million | $305.6 million | $284.9 million |
| Fathom Events revenue | $5.7 million | $8.8 million | $27.3 million | $35.9 million |
| Operating income | $78.1 million | $74.0 million | $140.4 million | $139.2 million |
| Adjusted OIBDA | $85.1 million | $80.0 million | $162.9 million | $161.3 million |
| Adjusted OIBDA margin | 59.2% | 58.8% | 48.9% | 50.3% |
| Net income attributable to NCM, Inc. | $16.7 million | $16.8 million | $13.9 million | $24.8 million |
| Diluted EPS | $0.30 | $0.31 | $0.25 | $0.45 |
For the nine months, operating cash flow was $32.2 million versus $109.0 million in the prior-year period. Investing cash flow was negative $4.5 million, and financing cash flow was negative $33.4 million. Capital expenditures were $7.6 million. Cash and cash equivalents were $60.2 million at September 27, 2012, and cash, cash equivalents and marketable securities totaled $82.4 million.
Total debt was $850.0 million, consisting of $25.0 million outstanding under the revolving facility, $225.0 million of term loans, $200.0 million of 7.875% senior unsecured notes and $400.0 million of 6.00% senior secured notes. Revolving facility availability was $94.0 million, producing total liquidity availability of $176.4 million. The reported net senior secured leverage ratio was 2.9 times versus a 6.5-times covenant.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 5.7%, driven by an 8.5% increase in advertising revenue. Nine-month revenue increased 3.8%, while advertising revenue increased 7.3%.
- National advertising revenue increased 13.7% in the quarter and 12.2% for the nine months, excluding founding-member beverage revenue. Q3 national growth reflected higher inventory utilization and a 0.8% increase in national CPMs, partly offset by lower attendance.
- Local advertising revenue declined 5.3% in Q3 and 6.8% year to date, reflecting lower average contract values and lower local revenue per attendee.
- Fathom Events revenue declined 35.2% in Q3 and 24.0% for the nine months, primarily because the Fathom Business Events division was wound down. Fathom Consumer revenue increased in Q3 but declined modestly for the nine months.
- Operating income increased 5.5% in Q3 but was essentially flat for the nine months. Adjusted OIBDA increased 6.4% in Q3 but only 1.0% year to date; the nine-month margin declined to 48.9% from 50.3%.
- Nine-month net income attributable to NCM, Inc. fell 44.0%, primarily because of a $26.7 million loss on partial interest-rate-swap terminations and higher borrowing interest expense.
- On April 27, 2012, the company issued $400.0 million of 6.00% senior secured notes, used proceeds to repay $325.0 million of term loans, repay approximately $25.0 million of revolver borrowings and pay $40.2 million to terminate related swaps. The transaction extended average debt maturities by more than three years and increased liquidity.
Outlook, Risks, Contingencies and Unusual Items
- Management expects operating cash flow and cash on hand to fund working capital, debt service, capital expenditures and other investing needs for at least the next 12 months. Management also expects cash distributions from NCM LLC and existing cash to support taxes, tax-sharing payments and declared dividends.
- The company expects continued network expansion. Contracted founding-member and affiliate theatres added after September 29, 2011 were expected to contribute approximately 36 million annual attendees and approximately 504 million salable national advertising impressions on a full-year pro forma basis.
- Advertising demand remains exposed to macroeconomic conditions, national advertising spending, inventory utilization, CPMs, theatre attendance and customer concentration. One telecommunications customer represented approximately 14.0% of Q3 revenue.
- The company is exposed to seasonality, with advertising expenditures and theatre attendance generally higher in the second, third and fourth fiscal quarters.
- The IRS is examining NCM LLC’s 2007 and 2008 tax returns and has proposed adjustments relating primarily to cash received by founding members around the IPO. The company filed a protest in July 2012 and disputes the IRS position. Potential payments under the tax receivable agreement and related refunds cannot currently be reasonably estimated.
- Network affiliate agreements include minimum revenue guarantees with a maximum potential future payment obligation of $34.4 million; no liability was recorded because expected revenue shares exceeded the guaranteed amounts.
- At September 27, 2012, interest-rate swaps fixed the $225.0 million term loan at an annual rate of 6.484%. Remaining interest-rate exposure primarily relates to the $25.0 million drawn on the revolving facility.
- The company declared a $0.22-per-share dividend, approximately $12.0 million, on October 30, 2012, payable November 29, 2012. No formal quantitative revenue or earnings guidance is provided in the filing.
Investor Verification Items
- Verify the sustainability of elevated national advertising inventory utilization and the contribution from the large telecommunications contract.
- Assess the effect of declining local advertising and Fathom Events revenue on future growth and margins.
- Review debt maturities, floating-rate exposure, swap obligations and compliance with leverage and other debt covenants.
- Monitor operating cash conversion, receivables growth, mandatory distributions to founding members and dividend funding capacity.
- Follow the IRS examination and any potential tax receivable agreement payments or related refunds.
- Evaluate customer concentration, network affiliate minimum guarantees and the operational impact of continued theatre-network expansion.