National CineMedia, Inc. 2011 Q3 Form 10-Q Summary
Business context and reporting period
National CineMedia operates a digital in-theatre advertising and entertainment network in North America under long-term exhibitor services agreements with AMC, Regal and Cinemark, as well as agreements with other theatre affiliates. Revenue is primarily generated from advertising, with additional revenue from Fathom Consumer and Business Events.
The filing covers the quarter and nine months ended September 29, 2011, compared with the periods ended September 30, 2010. The financial statements are unaudited and the business is seasonal, with generally higher advertising demand and theatre attendance in the second through fourth quarters.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $136.0 million | $125.7 million | $320.8 million | $309.4 million |
| Advertising revenue | $127.1 million | $117.7 million | $284.8 million | $275.6 million |
| Fathom Events revenue | $8.8 million | $8.0 million | $35.9 million | $33.7 million |
| Operating income | $74.0 million | $67.1 million | $139.2 million | $136.8 million |
| Operating margin | 54.4% | 53.4% | 43.4% | 44.2% |
| Adjusted OIBDA | $80.0 million | $74.4 million | $161.3 million | $156.8 million |
| Adjusted OIBDA margin | 58.8% | 59.2% | 50.3% | 50.7% |
| Net income attributable to NCM, Inc. | $16.8 million | $11.8 million | $24.8 million | $17.6 million |
| Diluted EPS | $0.31 | $0.24 | $0.45 | $0.39 |
| Net income attributable margin | 12.4% | 9.4% | 7.7% | 5.7% |
Quarterly revenue increased 8.2%, operating income increased 10.3%, and net income attributable to NCM, Inc. increased 42.4%. Nine-month revenue increased 3.7%, operating income increased 1.8%, and attributable net income increased 40.9%.
- Q3 national advertising revenue excluding beverage revenue increased 6.5% to $92.1 million; local advertising revenue increased 14.0% to $24.5 million.
- Q3 total theatre attendance increased 10.5% to 180.3 million, while advertising revenue per attendee declined 2.4% to $0.705.
- Nine-month attendance declined 0.2% to 489.1 million, but advertising revenue per attendee increased 3.6% to $0.582.
- Adjusted OIBDA increased 7.5% in Q3 and 2.9% for the nine-month period, while margins declined modestly in both periods.
Cash flow, liquidity and capital structure
| Metric | 9M 2011 | 9M 2010 |
|---|---|---|
| Cash flow from operating activities | $109.0 million | $100.6 million |
| Cash flow used in investing activities | $29.2 million | $8.3 million |
| Cash flow used in financing activities | $92.5 million | $127.5 million |
| Ending cash and cash equivalents | $61.7 million | $55.9 million |
- Cash, cash equivalents and short-term investments totaled $68.7 million at September 29, 2011, compared with $82.9 million at December 30, 2010.
- Total liquidity availability was $163.7 million, consisting of cash and short-term investments plus $95.0 million of available revolver capacity.
- Total borrowings were approximately $774.0 million, comprising $550.0 million of term debt, $24.0 million drawn on the revolver and $200.0 million of 7.875% Senior Notes due 2021.
- The company prepaid $175.0 million of term debt and repaid $21.0 million on the revolver using proceeds from the Senior Notes. The revolving facility was expanded to $119.0 million and extended to December 31, 2014.
- The entire $550.0 million term loan was hedged at an effective fixed rate of 6.484%. The company’s net senior secured leverage ratio was 2.6 times, versus a 6.5-times threshold for unrestricted distributions under the credit agreement.
- Cash dividends paid during the first nine months totaled $33.4 million. A subsequent $0.22-per-share dividend, approximately $12.0 million, was declared on November 3, 2011 for payment December 1, 2011.
Material changes versus the prior comparable period
- Revenue growth was led by local advertising, expansion of the affiliate network, higher theatre attendance in Q3 and increased Fathom Events revenue.
- Advertising operating costs increased 44.8% in Q3, primarily because of higher payments to network affiliates and a 46.4% increase in affiliate screens.
- Theatre access fees increased 11.8% in Q3 and 5.5% for the nine-month period, reflecting contractual per-screen increases, higher-quality digital equipment access and attendance-related costs.
- Administrative and other costs decreased 18.3% in Q3, mainly because of lower incentive and share-based compensation expense.
- Interest expense and other increased in Q3 because of the new Senior Notes, credit facility amendment and a $1.5 million non-cash write-off of deferred loan fees. This was partly offset by a smaller derivative fair-value charge.
- Investing cash use increased due to a $14.7 million purchase of an intangible asset associated with an advertising affiliate agreement and higher capital expenditures.
- Consolidated equity remained negative at $(346.2) million at September 29, 2011, including NCM, Inc. stockholders’ deficit of $(427.5) million.
Guidance, outlook, risks and unusual items
- Management expects approximately $3.0 million of additional borrowing interest expense in Q4 2011 compared with Q4 2010 due to the higher rate on the Senior Notes.
- Management expects full-year 2011 depreciation and amortization to exceed 2010 because of additional intangible assets recorded during 2010 and 2011.
- New and contracted founding-member and affiliate theatres were expected to add approximately 66 million annual attendees and more than 920 million salable national advertising impressions on a full-year pro forma basis, creating potential growth opportunities in 2012 and beyond. This is management’s expectation, not a guarantee.
- The IRS is examining NCM LLC’s 2007 and 2008 tax returns. A September 2011 Notice of Proposed Adjustment primarily concerns the characterization of cash received by founding members around the IPO. The company disagrees with the IRS position and intends to contest it. Potential payments or refunds cannot be reasonably estimated and were not recorded.
- The company recorded an immaterial out-of-period tax correction in Q3, reducing its deferred tax asset by $37.4 million and its long-term payable to founding members by $19.5 million, with related deferred tax effects.
- Minimum revenue guarantees under network affiliate agreements could require future payments of up to $17.2 million; no liability was recorded because current expected affiliate revenue shares exceeded the guarantees.
- Management believes cash on hand and future operating cash flow will fund working capital, debt service, capital expenditures and other requirements for at least the next 12 months.
- Management disclosed continued uncertainty from the macroeconomic environment, advertising spending cycles, television scatter-market conditions, theatre attendance, receivable collections and seasonality. No material changes to previously disclosed risk factors were reported.
- Management stated that discussions regarding a possible restructuring of the Fathom Events relationship with founding members were ongoing, but no outcome was known.
Most important facts for investors to verify
- Whether advertising growth and planned network expansion offset lower advertising revenue per attendee and rising affiliate-related operating costs.
- The effect of the 7.875% Senior Notes and debt refinancing on future interest expense, free cash flow and dividend capacity.
- Compliance with debt covenants and maintenance of the 2.6-times net senior secured leverage ratio.
- The eventual resolution and financial impact of the IRS examination and related tax-sharing obligations.
- The sustainability of distributions from NCM LLC, given seasonal cash flows, substantial debt, founding-member distributions and dividends.
- The outcome of discussions concerning the Fathom Events relationship and any effect on revenue, margins or theatre access.