National CineMedia, Inc. — Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. operates North America’s largest digital in-theatre advertising network and provides Fathom Events through National CineMedia, LLC. Its principal relationships are long-term exhibitor services agreements with AMC, Regal and Cinemark, together with network affiliate agreements. The filing covers the three and six months ended June 27, 2013, compared with the periods ended June 28, 2012. Results are unaudited and seasonal.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $122.8 million | $110.1 million | $205.0 million | $189.2 million |
| Operating income | $58.0 million | $45.3 million | $79.6 million | $62.3 million |
| Operating margin | 47.2% | 41.1% | 38.8% | 32.9% |
| Net income attributable to NCM, Inc. | $9.5 million | $(1.9) million | $8.5 million | $(2.8) million |
| Diluted EPS | $0.17 | $(0.03) | $0.15 | $(0.05) |
| Adjusted OIBDA | $66.2 million | $53.0 million | $95.3 million | $77.8 million |
| Adjusted OIBDA margin | 53.9% | 48.1% | 46.5% | 41.1% |
- Advertising revenue increased 15.4% in the quarter to $116.9 million and 13.7% year to date to $190.6 million. Fathom Events revenue declined 33.0% in the quarter and 33.3% year to date.
- Q2 national advertising revenue rose 16.0% and local advertising revenue rose 16.1%. National inventory utilization increased to approximately 107.1% from 90.3%, although national CPMs excluding beverage revenue declined 9.1%.
- Operating expenses were unchanged at $64.8 million in Q2 and declined 1.2% year to date to $125.4 million. Depreciation and amortization increased to $6.2 million in Q2 and $11.6 million year to date.
- Consolidated net income was $32.0 million in Q2 and $33.9 million year to date. Income attributable to noncontrolling interests was $22.5 million and $25.4 million, respectively, leaving substantially lower earnings attributable to NCM, Inc.
- Net cash provided by operating activities was $43.9 million in the first six months, compared with cash used of $5.1 million in the prior-year period. Investing cash flow was $(15.5) million and financing cash flow was $(45.6) million.
- Cash and cash equivalents were $55.2 million at June 27, 2013, supplemented by $39.9 million of short-term marketable securities. Total cash, cash equivalents and marketable securities were $95.1 million, compared with $106.6 million at December 27, 2012.
- Total debt was $884.0 million, consisting of $14.0 million drawn on the revolving facility, $270.0 million of term loans, $200.0 million of 7.875% senior unsecured notes and $400.0 million of 6.0% senior secured notes.
- Revolving credit availability was $110.0 million, producing reported total liquidity availability of $205.1 million. The company was in compliance with debt covenants; its consolidated net senior secured leverage ratio was 2.9x versus a 6.5x covenant limit.
- Total assets were $952.5 million and total liabilities were $1.177 billion. Consolidated equity remained negative at $(224.6) million, including NCM, Inc. stockholders’ deficit of $(396.2) million and noncontrolling interests of $171.6 million.
Material changes versus the prior comparable period
- Revenue growth was driven by stronger national and local advertising demand, increased network attendance in Q2, higher inventory utilization and network expansion. Total theatre attendance increased 7.0% in Q2 but declined 0.7% for the first half.
- Fathom revenue declined because management held fewer consumer events with higher expected margins: 15 event nights in Q2 2013 versus 26 in Q2 2012, and 34 in the first half versus 51.
- Operating income benefited from revenue growth and stable or lower operating costs. Adjusted OIBDA increased 24.9% in Q2 and 22.5% year to date.
- Non-operating expense declined materially because the prior-year periods included a $26.7 million loss on interest-rate-swap terminations. Interest expense also decreased because of debt refinancings and lower rates, although amortization of terminated derivatives increased.
- During Q2, NCM LLC issued 5.3 million membership units to Cinemark following Cinemark’s acquisition of Rave Cinemas and recorded a $91.2 million intangible asset. In the first quarter, it had issued 4.5 million units and recorded a $69.0 million intangible asset for new theatre access.
- On May 2, 2013, the senior secured credit facility was amended. The term loan increased by $5.0 million to $270.0 million and applicable borrowing margins were reduced.
- Cash distributions declared by NCM LLC for Q2 were $52.5 million, including $23.7 million payable to NCM, Inc. The company declared a $0.22 per-share dividend on August 1, 2013.
Guidance, outlook, commentary, risks and unusual items
- Management stated that operating cash flow and cash on hand should fund working capital, debt service, capital expenditures and other investing requirements for the next 12 months, supported by revolving-facility availability.
- Management expects network additions contracted during 2012 and 2013 to add approximately 26 million annual attendees and approximately 364 million salable national advertising impressions on a full-year pro forma basis.
- Management expects to continue selling 60 seconds of advertising time to founding members under beverage concessionaire arrangements for the remainder of 2013. Future beverage-contract changes could alter the amount of inventory purchased by founding members.
- Key risks include macroeconomic conditions, national and local advertising spending, pricing pressure, theatre attendance, seasonality, substantial leverage and variable-rate exposure. A 100-basis-point change in applicable market rates would affect annual cash interest expense by approximately $2.8 million.
- Approximately $16.7 million of losses related to discontinued cash-flow hedges remained in accumulated other comprehensive income and will be amortized through February 2015. The term loan and revolving facility were unhedged at quarter-end.
- Network affiliate agreements include maximum potential future minimum revenue guarantees of $34.0 million; no liability was recorded because expected revenue shares exceeded the guaranteed amounts.
- The IRS examination of NCM LLC’s 2007 and 2008 tax returns remained unresolved. Management expected a favorable outcome, but any potential payments to founding members or related tax refunds could not be reasonably estimated.
- On August 1, 2013, NCM LLC signed a non-binding letter of intent to contribute Fathom Events to a new entity owned 90% by AMC, Regal and Cinemark. NCM LLC would receive an interest-bearing $25 million promissory note, retain a 10% ownership interest and provide nine months of transition services. Closing was expected in late Q3 or early Q4 2013, subject to final terms and approvals.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material litigation, defaults or changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether advertising utilization gains can be sustained without further CPM reductions.
- The effect of the planned Fathom Events spin-off, including the $25 million note, retained 10% interest, related-party governance and transition-services economics.
- Debt maturity, refinancing and interest-rate exposure, particularly the unhedged $270.0 million term loan.
- The outcome of the IRS tax examination and any resulting tax-sharing payments or refunds.
- The sustainability of cash distributions and dividends after debt service, founding-member distributions and tax-sharing obligations.
- Future attendance trends, network-affiliate additions, theatre access fees and the accounting impact of additional common-unit adjustments.