National CineMedia, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 26, 2019. Fiscal 2019 contained 52 weeks; the filing is an annual Form 10-K rather than a quarterly filing. Fourth-quarter revenue was $147.2 million, with operating income of $72.7 million and net income attributable to NCM, Inc. of $19.1 million.
Business context
NCM, Inc. is a holding company that manages National CineMedia, LLC, which operates a large U.S. cinema advertising network. NCM sells national, regional and local advertising through the Noovie pre-show, lobby screens and promotions, and digital and mobile products. NCM, Inc. owned approximately 48.8% of NCM LLC at year-end; Cinemark and Regal held the remaining common membership units.
- Network footprint: 21,208 screens in 1,734 theaters across 190 DMAs as of December 26, 2019.
- Network attendance: 651.4 million, down from 705.1 million in 2018.
- Founding-member ESAs had a weighted-average remaining term of approximately 19.8 years; ESAs and affiliate agreements together had a weighted-average remaining term of 17.1 years.
- Approximately 54% of network attendance was covered by the new Noovie format with Post-Showtime Inventory at year-end.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $444.8 million | $441.4 million | 0.8% |
| Operating income | $161.3 million | $154.3 million | 4.5% |
| Operating margin | 36.3% | 35.0% | Up approximately 130 bps |
| Adjusted OIBDA | $207.5 million | $205.4 million | 1.0% |
| Adjusted OIBDA margin | 46.7% | 46.5% | Up 20 bps |
| Net income attributable to NCM, Inc. | $36.1 million | $29.8 million | 21.1% |
| Diluted EPS | $0.46 | $0.37 | 24.3% |
| Operating cash flow | $143.6 million | $150.3 million | Down $6.7 million |
| Capital expenditures | $15.3 million | $15.4 million | Approximately flat |
Revenue mix: National advertising revenue increased 3.9% to $324.2 million, helped by higher utilization and $16.2 million of incremental Platinum Spot and branded-content revenue. Local revenue declined 5.4% to $66.9 million, regional revenue declined 9.5% to $24.7 million, and founding-member beverage revenue declined 7.6% to $29.0 million.
National advertising utilization increased from 113.5% to 125.9%, while national CPMs excluding beverage and Platinum Spot revenue declined 3.2%. Total advertising revenue per attendee increased 9.1% to $0.683 despite the 7.6% attendance decline.
Total operating expenses declined 1.3% to $283.5 million. Lower selling and marketing and administrative costs more than offset higher theater access fees, advertising operating costs and depreciation. Non-operating expense increased to $62.2 million, primarily because of higher interest expense, debt-refinancing costs and the change from a 2018 TRA remeasurement gain to a 2019 loss.
Balance sheet, debt and liquidity
- Cash, cash equivalents and marketable securities: $80.9 million, including $69.5 million available to NCM, Inc. after excluding $11.4 million held by NCM LLC.
- Revolver availability: $132.4 million; total reported liquidity was $213.3 million.
- Gross borrowings: $935.6 million; long-term debt carrying value, net of issuance costs: $923.9 million.
- Debt consisted principally of a $266.6 million term loan, $39.0 million drawn on the revolver, $230.0 million of 5.75% notes due 2026 and $400.0 million of 5.875% secured notes due 2028.
- NCM LLC issued the 2028 notes and redeemed the $400.0 million 6.0% notes due 2022, extending weighted-average remaining debt maturity to 6.9 years. The refinancing generated a $5.6 million loss on early retirement of debt.
- Approximately 67% of borrowings carried fixed interest rates. A 100-basis-point change in applicable variable rates would affect annual cash interest expense by approximately $3.1 million based on year-end balances.
- Net senior secured leverage was 3.0x versus a 4.5x covenant and a 5.5x restricted-payment threshold; net total leverage was 4.0x versus a 6.25x covenant.
NCM LLC distributed approximately $148.9 million of available cash in 2019, including approximately $72.5 million to NCM, Inc. The company declared $0.68 per common share in 2019 and declared a $0.19 per-share dividend payable March 17, 2020.
Material changes versus 2018
- The 2019 ESA Amendments with Cinemark and Regal extended contract terms by four years and introduced Post-Showtime Inventory and Platinum Spots beginning November 1, 2019.
- The new inventory helped increase national revenue and utilization, but resulted in $2.5 million of incremental 2019 payments to Cinemark and Regal for the short implementation period.
- The company adopted ASC 842 lease accounting prospectively. ESA and affiliate intangible amortization was reclassified as amortization of intangibles recorded for network theater screen leases; the accounting change affected presentation but not the underlying economics.
- Attendance declined 7.6%, while revenue increased modestly because of stronger national advertising performance and higher revenue per attendee.
- AMC redeemed 197,118 NCM LLC units for NCM, Inc. shares in October 2019 and held no NCM LLC units at year-end.
- First- and second-party data sets increased from 27.2 million to 106.5 million, and approximately 4.0 million moviegoers had downloaded NCM mobile applications.
Outlook, commentary and risks
- Management expected approximately 57% to 59% of network attendance to receive the new Noovie format during 2020, including additional affiliates.
- Management planned fiscal 2020 capital expenditures of approximately $14 million to $16 million, including approximately $7 million for digital product development and approximately $2.4 million for technology and system upgrades.
- The company expected full implementation of its upgraded sales planning, proposal and inventory-tracking system in 2021.
- Management stated that cash from operations, cash on hand and revolver availability should fund working capital, debt service and capital expenditures for the next twelve months.
- Key risks include declining theater attendance, changes in patron arrival and seating behavior, dependence on Cinemark and Regal ESAs, inability to obtain broader Post-Showtime access, advertising-market competition and pricing pressure, loss of major advertisers or content partners, technology and privacy risks, and substantial debt obligations.
- NCM, Inc. depends on NCM LLC distributions and management-service payments to fund dividends, taxes and corporate obligations. Dividends remain discretionary and subject to debt covenants and available cash.
- Network affiliate agreements carried maximum future minimum revenue guarantees of $84.6 million; $0.5 million was recorded as a liability at year-end.
- The tax receivable agreement payable to founding members totaled $198.0 million at year-end, with NCM, Inc. generally obligated to pay 90% of realized tax benefits covered by the agreement.
- The filing reports no material pending litigation and unqualified auditor opinions on the financial statements and internal control over financial reporting.
Investor verification items
- Verify whether Post-Showtime Inventory increases CPMs and revenue sufficiently to offset higher access fees and the 25% Platinum Spot revenue share payable to Cinemark and Regal.
- Track theater attendance, national utilization, CPM trends and revenue per attendee, particularly as streaming and reserved seating affect moviegoing behavior.
- Reconcile cash distributions, dividends, TRA payments and debt repayments to assess sustainable free cash flow and dividend coverage.
- Review debt maturities, variable-rate exposure, leverage covenant headroom and the company’s ability to refinance or repay debt.
- Assess execution of the planned 2021 sales-system implementation and the monetization, privacy compliance and return on investment of the digital data platform.
- Review the $198.0 million TRA liability, related-party arrangements with founding members and the potential dilution from approximately 81.5 million exchangeable NCM LLC units held by Cinemark and Regal.