National CineMedia, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 26, 2013, comprising 52 weeks. The filing is an annual report, although it includes unaudited fourth-quarter data. NCM, Inc. is a holding company that consolidates National CineMedia, LLC, which operated North America’s largest digital in-theatre advertising network. NCM, Inc. owned approximately 46.1% of NCM LLC at year-end; AMC, Cinemark and Regal owned the remaining 53.9%.
Business context and key developments
- Advertising generated 92.1% of FY2013 revenue; Fathom Events generated 7.9%.
- The network included 1,576 theatres and 19,878 total screens, including 19,054 digital screens, with approximately 699.2 million attendees.
- On December 26, 2013, NCM LLC sold Fathom Events to AC JV, LLC, owned 32% by each founding member and 4% by NCM LLC. NCM received $25.0 million of six-year, 5.0% promissory notes and retained a 4% equity interest.
- NCM LLC amended its exhibitor services agreements to remove Fathom-related rights and obligations. NCM remains dependent on long-term agreements with its founding members and network affiliates for theatre access.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $462.8 million | $448.8 million | 3.1% |
| Advertising revenue | $426.3 million | $409.5 million | 4.1% |
| Fathom Events revenue | $36.5 million | $39.3 million | (7.1%) |
| Operating income | $202.0 million | $191.8 million | 5.3% |
| Consolidated net income | $129.8 million | $65.3 million | Significant increase |
| Net income attributable to NCM, Inc. | $41.2 million | $13.4 million | 207.5% |
| Adjusted OIBDA | $234.5 million | $221.2 million | 6.0% |
| Adjusted OIBDA margin | 50.7% | 49.3% | Up 1.4 percentage points |
| Operating cash flow | $153.1 million | $81.6 million | Increase of $71.5 million |
| Capital expenditures | $10.6 million | $10.4 million | Approximately flat |
National advertising revenue increased 2.2% to $295.0 million, while local advertising revenue rose 10.9% to $89.9 million. Founding-member beverage advertising revenue increased 4.3% to $41.4 million. National inventory utilization increased from 98.8% to 109.3%, but national advertising CPMs excluding beverage revenue declined 7.6% because of pricing pressure, a broader client mix and increased competition.
Operating expenses increased 1.5% to $260.8 million. Theatre access fees increased 7.6% to $69.4 million, and depreciation and amortization increased 30.4% to $26.6 million, primarily due to new affiliate agreements and network-related intangible assets.
The FY2013 earnings increase was materially affected by the approximately $25.4 million after-expense gain on the Fathom sale, lower interest expense and the absence of FY2012’s $26.7 million loss on interest-rate-swap terminations. The effective tax rate declined to 33.0% from 67.2%, primarily because of a valuation-allowance reversal related to capital loss carryforwards.
At December 26, 2013, cash, cash equivalents and marketable securities totaled $126.0 million, including $71.3 million of short-term marketable securities. NCM LLC had $104.0 million of reported revolving-credit availability; total facility capacity was $124.0 million, with $20.0 million outstanding. Approximately $13.3 million of NCM LLC cash was unavailable for NCM, Inc.’s obligations.
Total borrowings were $890.0 million, consisting of $20.0 million drawn on the revolving facility, $270.0 million of term loans, $200.0 million of 7.875% senior unsecured notes due 2021 and $400.0 million of 6.0% senior secured notes due 2022. Approximately 67% of borrowings carried fixed rates. The reported net senior secured leverage ratio was 2.9 times versus a 6.5-times covenant.
Material changes versus the prior comparable period
- Revenue grew 3.1%, led by local advertising and content-partner spending. Content-partner revenue increased 17.3% to $84.0 million.
- Adjusted OIBDA increased 6.0%, and margin expanded to 50.7% from 49.3%.
- Cash flow from operations nearly doubled, primarily because FY2012 included $63.4 million of cash payments for terminated interest-rate swaps.
- Fathom Events revenue declined, but Fathom Consumer revenue was approximately flat despite a reduction in event nights from 90 to 73; average revenue per event increased 23.6%.
- NCM LLC issued additional membership units to founding members for theatre acquisitions and attendance additions. NCM, Inc.’s ownership declined from 48.6% to 46.1%, increasing the portion of earnings attributable to noncontrolling interests.
- Net intangible assets increased to $492.0 million from $280.3 million, primarily because of common-unit adjustments associated with founding-member theatre acquisitions and attendance additions.
- Quarterly FY2013 revenue was $122.7 million in the fourth quarter versus $115.9 million in the fourth quarter of FY2012. Fourth-quarter net income attributable to NCM, Inc. was $19.0 million versus a $0.5 million loss, primarily reflecting the Fathom-sale gain.
Guidance, outlook, risks and unusual items
- Management expected FY2014 capital expenditures of approximately $10.0 million to $11.0 million, mainly for software, inventory-management systems, reporting systems, mobile applications and affiliate-network equipment.
- Management expected national advertising CPM pressure to continue in 2014 as the client mix broadened and competition from online and mobile video platforms increased.
- Founding members were expected to continue purchasing 60 seconds of on-screen beverage advertising in 2014, although their beverage-supplier agreements were subject to renegotiation.
- Seven new affiliate circuits added during 2013 and early 2014, representing 303 screens, were expected to add approximately 8 million annual attendees and 118 million salable national advertising impressions on a full-year pro forma basis.
- NCM LLC’s variable-rate debt was unhedged following the 2012 termination of interest-rate swaps. A 100-basis-point change in relevant rates was estimated to affect annual cash interest expense by approximately $2.9 million.
- The company is highly dependent on the ESAs, founding-member support, theatre attendance, advertising budgets, CPMs and the financial condition of AMC, Cinemark and Regal. Loss, renegotiation, unenforceability or rejection of an ESA in a founding-member bankruptcy could materially reduce revenue and liquidity.
- The company’s holding-company liquidity depends principally on distributions from NCM LLC. Distributions are subject to debt covenants, available cash and NCM LLC operating-agreement requirements.
- Contractual cash obligations totaled approximately $1.66 billion, including $890.0 million of borrowings, $401.0 million of future cash interest, $172.6 million payable under the tax receivable agreement and $137.6 million of estimated future interest on that payable.
- The company reported no material pending litigation and no liabilities for network-affiliate minimum revenue guarantees, although the maximum potential future guarantees were $42.4 million.
- Subsequent to year-end, the board declared a regular $0.22-per-share dividend and a special $0.50-per-share dividend, both payable March 20, 2014.
Most important facts for investors to verify
- Reconcile FY2013 earnings and cash flow excluding the Fathom-sale gain and other unusual items, including terminated-derivative amortization and the tax valuation-allowance reversal.
- Review debt maturities, variable-rate exposure, covenant headroom and the scheduled December 31, 2014 maturity of the Lehman-related revolving-credit amount.
- Assess the sustainability of advertising growth given the 7.6% decline in national CPMs and management’s expectation of continued pricing pressure.
- Evaluate dependence on AMC, Cinemark and Regal, including ESA terms, theatre attendance, beverage advertising commitments and founding-member ownership influence.
- Monitor the decline in NCM, Inc.’s ownership of NCM LLC and the resulting effect on earnings attributable to NCM, Inc. shareholders.
- Confirm collection and repayment terms for the $25.0 million Fathom-sale notes and the performance of NCM’s retained 4% AC JV investment.
- Review the tax receivable agreement, including the $172.6 million estimated payable and the requirement to remit 90% of realized tax benefits to founding members.