National CineMedia, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that manages National CineMedia, LLC, which operates a digital cinema advertising network. NCM, Inc. owned approximately 43.8% of NCM LLC at December 31, 2015; AMC, Cinemark and Regal owned the remaining 56.2%. The fiscal year ended December 31, 2015 contained 52 weeks; fiscal 2014 contained 53 weeks. The company’s primary business is national, regional and local advertising delivered through cinema screens, lobby networks, websites and mobile applications.
At year-end, the network included 20,361 screens in 1,617 theatres, with approximately 694.7 million annual attendees. Approximately 98% of attendance was connected to the digital content network, and 100% of screens were digital.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $446.5 million | $394.0 million | +13.3% |
| National advertising revenue | $309.5 million | $258.8 million | +19.6% |
| Local and regional advertising revenue | $107.0 million | $96.8 million | +10.5% |
| Founding-member beverage revenue | $30.0 million | $38.4 million | -21.9% |
| Operating income | $148.0 million | $151.7 million | -2.4% |
| Consolidated net income | $63.7 million | $65.6 million | -2.9% |
| Net income attributable to NCM, Inc. | $15.4 million | $13.4 million | +14.9% |
| Diluted EPS | $0.26 | $0.23 | +13.0% |
| Adjusted OIBDA | $229.9 million | $199.3 million | +15.4% |
| Adjusted OIBDA margin | 51.5% | 50.6% | +0.9 percentage points |
| Operating cash flow | $105.3 million | $117.9 million | -10.8% |
| Capital expenditures | $13.0 million | $8.8 million | +$4.2 million |
National advertising growth reflected a 14.2% increase in impressions sold and a 6.7% increase in national CPMs, excluding beverage revenue. National inventory utilization increased from 115.7% to 128.3%. Total theatre attendance rose 0.9% to 694.7 million.
Fourth-quarter 2015 revenue was $136.4 million, operating income was $61.5 million, consolidated net income was $33.7 million and net income attributable to NCM, Inc. was $6.6 million, compared with fourth-quarter 2014 revenue of $123.1 million, operating income of $57.9 million, consolidated net income of $32.9 million and NCM, Inc. net income of $8.1 million.
Liquidity, debt and capital structure
- Cash, cash equivalents and marketable securities totaled $85.4 million at December 31, 2015, including $82.4 million available to NCM, Inc. excluding cash held by NCM LLC.
- Total liquidity, including revolver availability, was $154.4 million, down from $193.6 million at January 1, 2015.
- Total borrowings were $936.0 million, consisting of $66.0 million drawn on a $135.0 million revolving facility, a $270.0 million term loan, $200.0 million of 7.875% senior unsecured notes due 2021 and $400.0 million of 6.0% senior secured notes due 2022.
- The average remaining debt maturity was 5.3 years. Approximately 64% of borrowings carried fixed rates and 36% carried variable rates.
- NCM LLC’s consolidated net senior secured leverage ratio was 3.3 times versus a 6.5-times covenant, and the company reported compliance with its debt covenants.
- Total equity was negative $171.7 million, including a negative NCM, Inc. stockholders’ balance of $407.0 million and noncontrolling interests of $235.3 million.
- Cash dividends declared totaled $0.88 per common share in 2015. A $0.22-per-share dividend was declared on January 20, 2016.
Material changes versus the prior comparable period
- Advertising revenue increased 13.3%, driven principally by stronger national advertising demand, higher CPMs, greater inventory utilization and modestly higher attendance.
- Operating expenses increased 23.2% to $298.5 million. The increase included $34.3 million of Screenvision merger termination and related costs, compared with $7.5 million in 2014.
- Excluding merger-related costs, operating expenses increased 12.5%, primarily because of higher selling and marketing costs, compensation, commissions, bonuses and bad-debt expense.
- Operating income declined despite revenue growth because expense growth exceeded revenue growth. Adjusted OIBDA improved after excluding share-based compensation, merger-related costs and CEO transition costs.
- The Screenvision merger was terminated in March 2015 after Department of Justice litigation. NCM LLC paid approximately $26.8 million in termination fees and the company incurred approximately $15.0 million of related legal and other costs across 2014 and 2015.
- The CEO resigned in August 2015. Andrew J. England became CEO on January 1, 2016; CEO transition costs were approximately $0.6 million in 2015.
- AMC acquired Starplex Cinemas, resulting in 346 screens moving from network affiliates to founding-member screens and the issuance of 4.4 million NCM LLC units to AMC. NCM, Inc.’s ownership declined from 45.8% to 43.8%.
- AMC redeemed 200,000 NCM LLC units for 200,000 NCM, Inc. shares in December 2015.
Guidance, outlook, risks and unusual items
- Management expected 2016 capital expenditures of approximately $14.0 million to $15.0 million, primarily for software, distribution, reporting, audience-targeting and data-management systems.
- Management expected network expansion, improved audience targeting and additional inventory from shorter content-partner segments to support future advertising growth, but no formal revenue or earnings guidance was provided.
- The company expects beverage advertising CPMs to increase 5.7% in 2016 based on the contractual pricing formula. One founding member reduced its beverage advertising unit from 60 seconds to 30 seconds beginning July 1, 2015.
- A 2017 8% increase in the per-attendee theatre access fee is scheduled under the ESAs, while per-screen and digital-cinema-equipment fees increase 5% annually.
- Cash distributions to NCM, Inc. were constrained in 2015 by merger-related costs. A negative $11.5 million distribution calculation for NCM, Inc. will be netted against second-quarter 2016 distributions, expected to be settled in the third quarter of 2016.
- The tax rate increased to 53.6% from 43.3%, primarily because of a $4.9 million reserve for uncertain tax positions relating to prior periods. The company reported $3.9 million of unrecognized tax benefits excluding interest and penalties.
- Contractual cash obligations totaled approximately $1.56 billion, including $936.0 million of borrowings, $289.6 million of estimated cash interest, $166.5 million payable under the tax receivable agreement and $119.4 million of related interest.
- Key risks include theatre attendance declines, advertising-market competition, CPM and utilization volatility, loss of major customers or content partners, dependence on founding-member ESAs, technology failures, interest-rate exposure, substantial leverage, tax receivable agreement payments and the company’s dependence on distributions from NCM LLC.
Important facts for investors to verify
- Reconcile the strong revenue and Adjusted OIBDA growth with the decline in GAAP operating income and the recurring impact of elevated selling, marketing and access costs.
- Assess debt-service capacity, variable-rate exposure and the effect of the $44.0 million increase in revolver borrowings during 2015.
- Review the timing and amount of the deferred negative distribution caused by Screenvision costs and its effect on 2016 dividends.
- Evaluate dependence on AMC, Cinemark and Regal, which controlled approximately 83% of network screens and 84% of attendance.
- Monitor the tax reserve, tax receivable agreement obligations and the company’s negative consolidated equity position.
- Distinguish non-GAAP Adjusted OIBDA from GAAP earnings because the measure excludes share-based compensation, merger costs and CEO transition costs.
- Verify future advertising demand, CPM trends, inventory utilization and whether new digital and audience-targeting products generate material revenue.