National CineMedia, Inc. 2017 Form 10-K Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that manages National CineMedia, LLC, which operates a national cinema advertising network. Revenue is generated primarily from on-screen Noovie advertising, lobby advertising and promotions, and online and mobile products. NCM, Inc. owned approximately 49.5% of NCM LLC at December 28, 2017; AMC, Cinemark and Regal owned the remaining 50.5%.
The filing covers the 52-week fiscal year ended December 28, 2017, with comparisons to the years ended December 29, 2016 and December 31, 2015. Fourth-quarter 2017 revenue was $140.7 million, compared with $142.5 million in fourth-quarter 2016.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $426.1 million | $447.6 million | Down 4.8% |
| Operating income | $153.9 million | $173.0 million | Down 11.0% |
| Consolidated net income | $58.7 million | $82.0 million | Down 28.4% |
| Net income attributable to NCM, Inc. | $2.5 million | $20.4 million | Down 87.7% |
| Basic/diluted EPS | $0.04/$0.02 | $0.34/$0.34 | Down materially |
| Adjusted OIBDA | $205.1 million | $230.7 million | Down 11.1% |
| Adjusted OIBDA margin | 48.1% | 51.5% | Down 3.4 percentage points |
| Operating cash flow | $138.9 million | $133.5 million | Up $5.4 million |
| Capital expenditures | $12.3 million | $13.3 million | Down $1.0 million |
National advertising revenue declined 5.0% to $296.3 million, while local and regional advertising revenue declined 6.6% to $99.9 million. Beverage concessionaire revenue from founding members increased 4.2% to $29.9 million. Network attendance declined 4.8% to 655.8 million, while total screens increased to 20,850 from 20,548.
At December 28, 2017, cash, cash equivalents and marketable securities totaled $59.5 million, including $54.9 million available to NCM, Inc. excluding NCM LLC cash. Revolver availability was $158.2 million, resulting in total reported liquidity of $217.7 million. Gross borrowings were $932.0 million, consisting of $12.0 million drawn on the revolver, $270.0 million of term loans, $400.0 million of 2022 senior secured notes and $250.0 million of 2026 senior unsecured notes.
NCM LLC was in compliance with its debt covenants. Its consolidated net senior secured leverage ratio was 3.2 times versus a covenant limit of 6.5 times. Approximately 70% of outstanding borrowings carried fixed interest rates. A 100-basis-point change in variable rates was estimated to affect annual cash interest expense by approximately $2.8 million.
The Company declared dividends of $0.88 per common share for 2017. NCM LLC distributed approximately $160.9 million of available cash to its members, including $75.9 million to NCM, Inc.
Material changes versus the prior comparable period
- Revenue and Adjusted OIBDA declined primarily because of lower attendance, fewer impressions sold, lower national CPMs, lower content-partner spending and weaker local and regional advertising demand.
- National advertising CPMs excluding beverage revenue declined 4.2%, while national inventory utilization remained approximately flat at 118.5% versus 118.4% in 2016.
- Operating expenses decreased only 0.9%, causing operating margin pressure. Advertising operating costs and theater access fees increased, partly offset by lower network, selling and marketing, and administrative costs.
- The Company launched the Noovie pre-show in September 2017, replacing FirstLook, and continued investing in digital products including Fantasy Movie League, Noovie ARcade and Cinema Accelerator.
- AMC redeemed 15.6 million NCM LLC units for NCM, Inc. common shares during 2017. NCM, Inc.’s ownership of NCM LLC increased from 43.7% to 49.5%, and common shares outstanding increased materially.
- The Tax Cuts and Jobs Act resulted in a $118.2 million increase in deferred tax expense and a $103.6 million non-operating gain from remeasurement of the tax receivable agreement payable. These largely non-cash items significantly affected reported net income.
- The Company corrected and restated prior-period amounts for an error involving the tax receivable agreement, deferred taxes, related non-operating expense and equity balances. The correction did not affect revenue, operating income, cash balances or operating cash flow.
Guidance, outlook, commentary, risks and unusual items
Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for working capital, debt service, capital expenditures and other requirements for the next twelve months. Planned 2018 capital expenditures were approximately $19.0 million to $21.0 million, including digital product development, headquarters relocation and upgrades to distribution, inventory, targeting and data-management systems.
The Company expects the Tax Cuts and Jobs Act to reduce annual tax receivable agreement payments by approximately $8.0 million to $10.0 million beginning with payments related to fiscal 2018. Future dividends remain subject to Board approval, operating performance, cash needs, debt covenants and legal requirements.
Key risks include declining theater attendance or Noovie viewership, competition from television, online and mobile advertising, pricing and utilization volatility, loss of major advertisers or content partners, technology failures, cyber and privacy risks, dependence on the founding members and their exhibitor services agreements, substantial leverage, variable-rate debt exposure, and restrictions on distributions from NCM LLC.
The founding members’ agreements have more than 19 years of remaining term. However, founding-member theaters represented approximately 81% of network screens and approximately 83% of attendance, creating significant concentration and counterparty risk. Network affiliate agreements include maximum future minimum revenue guarantees of $82.6 million, although no liability was recorded for those guarantees at year-end.
Management and Deloitte concluded that internal control over financial reporting was not effective because of a material weakness in accounting for income taxes under ASC 740, particularly deferred tax accounts and the tax receivable agreement. Management initiated remediation, including redesigned tax review controls and planned simplification of TRA accounting.
Important facts for investors to verify
- Reconcile the sharp decline in NCM, Inc. attributable earnings and EPS with the largely non-cash Tax Act impacts, TRA remeasurement and increased ownership of NCM LLC.
- Review the sustainability of dividends relative to operating cash flow, required TRA payments, founding-member distributions, debt service and planned 2018 capital expenditures.
- Assess the maturity and refinancing risk associated with $282.0 million of debt due in 2019 and $400.0 million of senior secured notes due in 2022.
- Monitor theater attendance, Noovie viewership, national CPMs, inventory utilization and local advertising trends.
- Evaluate the effect of AMC’s required divestiture of NCM interests by June 2019, including potential share issuance, dilution, ownership changes and selling pressure.
- Confirm remediation of the material weakness and review subsequent filings for any restatement, control deficiency or tax-accounting change.
- Verify the effect of the Noovie launch and digital investments on revenue growth, audience engagement and margins.