Business Context and Reporting Period
Company: National Cinemedia, Inc. (NCM, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: April 2, 2009
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising, business meetings, and Fathom event services. The company operates under long-term Exhibitor Services Agreements (ESAs) with founding members (AMC, Regal, and Cinemark) and network affiliates. As of April 2, 2009, NCM, Inc. owned 41.5% of NCM LLC, with the founding members holding the remaining 58.5%.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $73.5 million | $62.7 million |
| Operating Income | $22.2 million | $17.7 million |
| Net Income (Consolidated) | $5.4 million | $1.0 million |
| Net Income Attributable to NCM, Inc. | $1.2 million | $(0.4) million |
| Earnings Per Share (Basic/Diluted) | $0.03 | $(0.01) |
| Operating Cash Flow | $38.4 million | $42.7 million |
| Cash and Cash Equivalents (End of Period) | $71.3 million | $32.3 million |
| Total Debt (Borrowings) | $806.0 million | N/A |
| Adjusted OIBDA Margin | 36.6% | 33.0% |
Note: Total Debt includes $725.0 million in term loans and $74.0 million in revolving credit facility borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17.2% to $73.5 million. This was driven by an 11.9% increase in advertising revenue and a 48.9% surge in meetings and events revenue.
- Advertising Mix: National advertising revenue rose 20.2% due to increased inventory utilization (67.4% vs. 58.7%) and network expansion. Conversely, local advertising revenue declined 19.6% to $9.0 million, attributed to the economic recession.
- Profitability: Operating income increased 25.4% to $22.2 million. Net income attributable to NCM, Inc. turned positive ($1.2 million) compared to a loss of $0.4 million in the prior year, aided by lower net interest expense.
- Interest Expense: Net interest expense decreased to $13.0 million from $16.0 million. This reduction included a $1.9 million credit related to the change in fair value of interest rate swaps following the Lehman Brothers bankruptcy.
- Operating Expenses: Total operating expenses rose 14.0% to $51.3 million, primarily due to higher advertising operating costs from network expansion and increased Fathom event expenses.
Guidance, Outlook, Risks, and Unusual Items
- Lehman Brothers Impact: A significant portion of the company's interest rate swaps ($137.5 million notional) is with Lehman Brothers Special Financing (LBSF), which is in bankruptcy. The swap is considered "ineffective" for accounting purposes. While the company has withheld payments, the uncertainty regarding the termination or assignment of this hedge remains a risk. Additionally, $6.0 million of the revolving credit facility commitment from Lehman Commercial Paper Inc. is unfunded, though management does not anticipate needing this liquidity.
- IdeaCast Restructuring: The company settled a contingent put obligation related to IdeaCast by assuming $20.7 million of debt and issuing a $7.0 million note payable to Credit Suisse. Foreclosure proceedings on IdeaCast assets have begun.
- Economic Environment: Management notes that the current recession continues to adversely affect local advertising spending. However, national advertising remains resilient due to network expansion and the perceived effectiveness of cinema advertising.
- Dividends: A cash dividend of $0.16 per share (approx. $6.8 million) was declared on April 28, 2009, payable June 4, 2009.
- Seasonality: The first quarter is historically the weakest due to lower film attendance and marketing cycles. Results are not indicative of full-year performance.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the consolidated net senior secured leverage ratio (currently 3.9x vs. 7.0x covenant) given the uncertainty of the Lehman swap.
- Lehman Exposure: Monitor developments regarding the $137.5 million interest rate swap with LBSF and the $6.0 million unfunded revolver commitment from Lehman Commercial Paper Inc.
- Local Ad Trends: Assess the trajectory of local advertising revenue, which declined 19.6% in Q1, as a leading indicator of economic recovery in the company's client base.
- Intangible Assets: Review the amortization schedule for the $28.5 million intangible asset recorded in Q1 2009 for new screen rights and the $116.1 million asset from 2008.
- Related Party Transactions: Confirm the stability of revenue and cost structures tied to founding members (AMC, Regal, Cinemark), who control 58.5% of the operating LLC.