National CineMedia, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that manages National CineMedia, LLC and owns approximately 48.0% of its common membership units. The company sells cinema, lobby, digital and digital out-of-home advertising through the Noovie network. The fiscal year ended December 31, 2020 contained 53 weeks; the comparable fiscal year ended December 26, 2019 contained 52 weeks.
COVID-19 caused nearly all network theaters to close from mid-March through late August 2020. In-theater advertising resumed on September 4, 2020, but only 40.5% of network theaters were open at year-end. The network included approximately 20,450 screens in 1,656 theaters and 190 DMAs at December 31, 2020.
Financial performance and key metrics
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $90.4 million | $444.8 million | Down 79.7% |
| Operating income/(loss) | $(61.0) million | $161.3 million | Down $222.3 million |
| Net income/(loss) attributable to NCM, Inc. | $(65.4) million | $36.1 million | Down $101.5 million |
| Basic diluted EPS | $(0.84) | $0.47/$0.46 | Turned negative |
| Adjusted OIBDA | $(19.4) million | $207.5 million | Down 109.3% |
| Adjusted OIBDA margin | (21.5%) | 46.7% | Down 68.2 percentage points |
| Operating cash flow | $55.3 million | $143.6 million | Down $88.3 million |
| Capital expenditures | $11.2 million | $15.3 million | Down $4.1 million |
| Theater attendance | 138.2 million | 651.4 million | Down 78.8% |
Revenue consisted of $66.7 million of national and regional advertising, $17.5 million of local advertising and $6.2 million of founding-member beverage advertising. National and regional revenue declined primarily because impressions sold fell 80.8%; national CPMs on delivered impressions declined 17.2%.
Cash, cash equivalents and marketable securities totaled $181.8 million at year-end, including $123.9 million held at NCM LLC for operating needs and unavailable for NCM, Inc. dividends and other parent-level obligations. Total reported liquidity was $186.2 million, consisting of cash and securities plus $4.4 million of revolving-credit availability. Receivables declined to $16.2 million from $170.8 million, primarily because the company collected prior-period receivables while revenue fell.
Total borrowings were $1.060 billion, compared with $935.6 million at the prior year-end. Debt comprised $167.0 million drawn on the revolver, $263.3 million of term loans, $230.0 million of senior unsecured notes due 2026 and $400.0 million of senior secured notes due 2028. Approximately 59% of borrowings carried fixed rates. A 100-basis-point change in applicable variable rates would change annual cash interest expense by approximately $4.3 million.
Material changes versus the prior comparable period
- Revenue, attendance and Adjusted OIBDA deteriorated sharply because of theater closures, capacity restrictions, reduced showtimes and delayed or alternative releases of major films.
- Operating expenses declined 46.6% to $151.4 million, aided by lower attendance-based theater access fees, reduced commissions and marketing, furloughs, salary reductions and other cash-preservation measures.
- The company drew an additional $110.0 million on its revolving facility in March 2020. Revolver borrowings increased from $39.0 million to $167.0 million.
- Quarterly revenue was highly abnormal: $64.7 million in the first quarter, $4.0 million in the second, $6.0 million in the third and $15.7 million in the fourth quarter.
- The quarterly dividend was reduced from $0.19 per share in the fourth quarter of 2019 to $0.05 in the fourth quarter of 2020. Total dividends declared declined to $0.40 per share from $0.68.
- The company increased its deferred-tax-asset valuation allowance by $139.0 million, resulting in $162.2 million of income-tax expense. It also recognized a $152.7 million non-cash gain from remeasuring the tax receivable agreement liability, reducing that liability to $33.5 million.
- Operating cash flow remained positive largely because of a $158.0 million reduction in receivables and substantial non-cash tax and amortization adjustments; it was not indicative of normalized earnings power.
Guidance, outlook, risks and unusual items
Management expects approximately $8.0 million to $9.0 million of fiscal 2021 capital expenditures, including approximately $3.3 million for digital product development and approximately $2.3 million for software, systems and network upgrades. The first phase of a new end-to-end order-management and scheduling system was implemented in the first quarter of 2021.
Management expects recovery to depend on theater reopenings, major film releases, removal of capacity restrictions and patrons’ willingness to return. It remains optimistic about potential pent-up demand but provides no revenue or earnings forecast and states that the timing and extent of normalization are uncertain.
On March 8, 2021, NCM LLC amended its credit agreement. The amendment added $50.0 million of incremental term loans bearing interest at LIBOR plus 8.00% and maturing December 20, 2024; increased applicable margins by 1.00%; granted additional collateral to lenders; waived specified leverage-covenant noncompliance through June 30, 2022; and restricted available cash distributions until after delivery of a compliance certificate for the quarter ending around September 29, 2022. The filing states that substantial doubt about going concern no longer existed after this additional funding and covenant relief.
Key risks include prolonged or renewed theater closures, reduced attendance, shortened theatrical release windows, studio releases bypassing theaters, financial distress or bankruptcy of founding members, high leverage and restricted distributions, dependence on long-term exhibitor agreements, loss of major advertisers or content partners, technology implementation risks, privacy and data-security regulation, and potential impairment of theater-rights intangible assets. Network affiliate agreements also contain future minimum revenue guarantees with a maximum potential obligation of $59.1 million, although no liability was recorded at year-end.
Important facts an investor should verify
- Current theater reopening rates, attendance recovery, film-release schedules and the resulting advertising impressions and CPM trends.
- Compliance with amended debt covenants, cash minimums, revolver availability and the timing of any permitted distributions from NCM LLC.
- Terms and funding requirements of the $50.0 million incremental term loan and the effect of higher interest margins on liquidity.
- Whether the deferred-tax valuation allowance and tax receivable agreement liability will reverse as operations normalize, potentially creating future tax expense and TRA payments.
- The sustainability of dividends while parent-level cash is limited and NCM LLC distributions remain restricted.
- Potential impairment charges for the $627.8 million of net contractual-rights intangible assets if theater recovery or exhibitor relationships underperform management’s assumptions.
- Execution and financial-reporting implications of the new order-management and scheduling system implemented in early 2021.