National CineMedia, Inc. 2018 Form 10-K Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that consolidates National CineMedia, LLC, which operates a U.S. cinema advertising network. Revenue is generated primarily from national, regional and local advertising in the Noovie cinema pre-show, lobby advertising, promotions, and online and mobile products. NCM, Inc. owned approximately 48.8% of NCM LLC at December 27, 2018; Cinemark and Regal owned the remaining 51.2%.
The filing covers the 52-week fiscal year ended December 27, 2018, with quarterly information provided for the fourth quarter ended December 27, 2018. The 2018 fourth quarter generated revenue of $137.4 million, operating income of $60.8 million, consolidated net income of $41.0 million and net income attributable to NCM, Inc. of $16.3 million.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $441.4 million | $426.1 million | +3.6% |
| Operating income | $154.3 million | $153.9 million | +0.3% |
| Net income attributable to NCM, Inc. | $29.8 million | $58.3 million | -48.9% |
| Basic EPS | $0.39 | $0.89 | -56.2% |
| Diluted EPS | $0.37 | $0.48 | -22.9% |
| Adjusted OIBDA | $205.4 million | $205.1 million | +0.1% |
| Adjusted OIBDA margin | 46.5% | 48.1% | -1.6 percentage points |
| Operating cash flow | $150.3 million | $138.9 million | +8.2% |
| Capital expenditures | $15.4 million | $12.3 million | +25.2% |
Revenue growth was driven by a 5.3% increase in national advertising revenue to $312.0 million and a 5.0% increase in founding-member beverage advertising revenue to $31.4 million. Local and regional advertising revenue declined 1.9% to $98.0 million. National advertising revenue benefited from a 2.2% increase in CPMs and a 3.0% increase in impressions sold, while national inventory utilization declined from 118.5% to 113.5%.
Total theater attendance increased 7.5% to 705.1 million. Revenue per attendee declined 3.7% to $0.626, reflecting lower monetization despite higher attendance. The network ended the year with 21,172 screens in 1,730 theaters, including 4,404 affiliate screens.
Operating expenses increased 5.5% to $287.1 million. Advertising operating costs and theater access fees increased with affiliate expansion and attendance, while selling and marketing costs declined. Administrative and other costs increased 27.4%, partly because of CEO transition costs, digital product investment, legal and professional fees, and higher rent.
Cash, cash equivalents and marketable securities totaled $75.6 million at year-end, including $68.4 million available to NCM, Inc. excluding cash held at NCM LLC. Total liquidity, including revolver availability, was $218.8 million. Total borrowings were $931.4 million gross, and the tax receivable agreement payable to founding members was $211.1 million.
Debt consisted principally of $400.0 million of 6.0% senior secured notes due 2022, $269.4 million of term loans, $27.0 million drawn under the revolving credit facility, and $235.0 million of 5.75% senior unsecured notes due 2026. NCM LLC reported a net senior secured leverage ratio of approximately 3.1 to 3.2 times and a net total leverage ratio of 4.2 times, within applicable covenant thresholds.
Material changes versus the prior comparable period
- Revenue increased 3.6%, primarily from national advertising and higher theater attendance.
- Adjusted OIBDA was essentially flat, but margin declined from 48.1% to 46.5% because operating costs grew faster than revenue.
- Net income attributable to NCM, Inc. fell by $28.5 million. The principal driver was the absence of the $192.2 million non-cash gain recognized in 2017 from remeasurement of the TRA payable after the Tax Cuts and Jobs Act.
- Income tax expense declined from $180.3 million to $23.5 million, primarily because the 2017 Tax Act reduced the federal tax rate and caused a large 2017 deferred-tax remeasurement.
- Operating cash flow increased by $11.4 million, while investing cash flow changed from $8.5 million provided in 2017 to $16.1 million used in 2018, primarily because of lower marketable-securities proceeds and higher capital investment.
- NCM LLC refinanced its senior secured credit facility in June 2018, extending stated maturities to 2023 for the revolver and 2025 for the term loan, subject to refinancing the 2022 notes by October 30, 2021.
- NCM LLC repurchased and canceled $15.0 million of the 2026 notes at a discount, producing a $0.6 million net gain and reducing future interest expense.
- AMC sold its remaining NCM LLC membership units to Cinemark and Regal in July 2018 and no longer held NCM equity interests at year-end.
- The former Chief Executive Officer resigned in November 2018. The President became Interim Chief Executive Officer while the Board searches for a permanent CEO.
Guidance, outlook, commentary, risks and unusual items
Management expected 2019 capital expenditures of approximately $15.0 million to $16.0 million, including roughly $8.0 million for digital product development and approximately $8.0 million for software, data, reporting and network-system upgrades. Planned initiatives included the full launch of Noovie.com, a Noovie Trivia application, additional Noovie ARcade development, Fantasy Movie League enhancements and development of Cinema Accelerator 2.0.
Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for working capital, debt service and capital expenditures for at least the next twelve months. A $0.17-per-share dividend, approximately $13.1 million, was declared on February 21, 2019 for payment on March 19, 2019.
The company’s principal risks include dependence on theater attendance and moviegoer viewership of the Noovie pre-show; competition from television, online, mobile and other advertising platforms; volatility in CPMs and advertising demand; dependence on major theater partners, content partners and advertisers; technology, cybersecurity, privacy and intellectual-property risks; management succession; and substantial indebtedness.
The ESAs with the founding members had more than 18 years remaining at year-end and cover approximately 79.2% of network screens and 82.4% of network attendance. Changes in the financial condition, ownership or cooperation of Cinemark or Regal could materially affect the business. Network affiliate agreements include maximum potential minimum revenue guarantees of $70.8 million over their remaining terms.
Unusual or nonrecurring items included $3.4 million of CEO transition costs, $7.8 million of share-based compensation, the $0.6 million net gain on debt repurchases, and a $3.8 million gain from remeasurement of the TRA payable. The company also carried an $8.0 million make-good reserve for undelivered advertising impressions.
The company adopted a change in accounting principle to present TRA obligations on an undiscounted basis and recast prior periods. It also adopted the new revenue standard, which had no material effect on the financial statements. Management and Deloitte & Touche reported effective internal control over financial reporting; a previously disclosed tax-accounting material weakness was reported as remediated.
Important facts for investors to verify
- Reconcile the sharp decline in GAAP net income and EPS with the largely stable Adjusted OIBDA and operating cash flow, especially the impact of non-cash TRA and tax items.
- Review debt maturities, interest-rate exposure and the requirement to refinance the 2022 notes to preserve the extended 2023 and 2025 credit-facility maturities.
- Assess dividend sustainability against NCM LLC distributions, TRA payments, debt service, capital expenditures and covenant restrictions.
- Monitor national inventory utilization, CPM trends and revenue per attendee, which declined despite higher attendance.
- Evaluate the effect of Cinemark and Regal ownership, AMC’s exit, and the long-term ESAs on network access and governance.
- Track execution and monetization of Noovie.com, Noovie ARcade, Cinema Accelerator and other digital investments.
- Review renewal and concentration risk for content-partner, PSA, beverage-advertising and network-affiliate agreements.
- Consider the potential effect of the $70.8 million affiliate minimum guarantees, the $211.1 million TRA payable and the company’s overall negative consolidated equity position.