National CineMedia, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2016, consisting of 52 weeks. The filing also provides unaudited fourth-quarter results for the quarter ended December 29, 2016. NCM, Inc. is a holding company that owns approximately 43.7% of National CineMedia, LLC, the operating company; AMC, Cinemark and Regal owned the remaining 56.3%.
Business Context
NCM sells cinema, lobby, online and mobile advertising, principally through its FirstLook pre-show. At year-end, its network included 20,548 screens in 1,622 theaters, approximately 688.8 million annual attendees and 3,029 Lobby Entertainment Network screens in 1,505 theaters. Founding-member exhibitor agreements have more than 20 years of remaining term, while network-affiliate agreements expire between July 2017 and July 2031.
Financial Performance and Liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $447.6 million | $446.5 million | 0.2% |
| Operating income | $173.0 million | $148.0 million | 16.9% |
| Consolidated net income | $87.0 million | $63.7 million | 36.7% |
| Net income attributable to NCM, Inc. | $25.4 million | $15.4 million | 64.9% |
| Diluted EPS | $0.42 | $0.26 | 61.5% |
| Adjusted OIBDA | $230.7 million | $229.9 million | 0.3% |
| Adjusted OIBDA margin | 51.5% | 51.5% | Stable |
| Operating cash flow | $133.5 million | $105.3 million | +$28.2 million |
| Capital expenditures | $13.3 million | $13.0 million | +$0.3 million |
National advertising revenue increased 1.6% to $311.9 million as a 9.6% increase in CPMs and higher online, mobile and other revenue offset an 8.2% decline in impressions sold. Local and regional advertising revenue decreased 2.3% to $107.0 million, while founding-member beverage revenue declined 4.3% to $28.7 million. Network attendance declined 0.8% to 688.8 million, but total advertising revenue per attendee increased 1.1% to $0.650.
Cash, cash equivalents and marketable securities totaled $68.7 million at year-end, including $58.0 million available to NCM, Inc. excluding cash held by NCM LLC. Revolver availability was $158.8 million, producing reported total liquidity of $227.5 million. NCM, Inc. received approximately $57.5 million of NCM LLC distributions during the year and declared dividends of $0.88 per share.
Gross borrowings were $935.0 million, comprising a $15.0 million revolver balance, $270.0 million of term loans, $400.0 million of 6.0% senior secured notes due 2022 and $250.0 million of 5.75% senior unsecured notes due 2026. Approximately 70% of borrowings carried fixed rates. The company reported a 3.0-times consolidated net senior secured leverage ratio versus a 6.5-times covenant.
Material Changes Versus FY2015
- Revenue was essentially flat, despite higher national CPMs, because impressions sold and attendance declined.
- Operating expenses decreased 8.0% to $274.6 million, primarily because FY2015 included $34.3 million of Screenvision merger termination costs.
- Underlying operating expenses excluding merger costs increased 3.9%, including higher theater access fees, administrative costs and depreciation and amortization.
- Non-operating expense increased 15.5% to $76.8 million, including a $10.4 million loss from redeeming the 7.875% notes due 2021.
- Operating cash flow improved, while financing cash usage increased due to debt repayment, dividends and distributions to founding members.
- NCM LLC issued 1.4 million common membership units to founding members for 2015 network additions, reducing NCM, Inc.’s ownership from 43.8% to 43.7%.
Guidance, Outlook, Risks and Unusual Items
Management expected FY2017 capital expenditures of approximately $15.0 million to $16.0 million, primarily for software, data-management, reporting and network upgrades. Management stated that operations and cash on hand should fund working capital, debt service and capital requirements for the next twelve months, but future dividends remain subject to Board discretion and NCM LLC distributions.
- AMC’s acquisition of Carmike required AMC to reduce its NCM LLC ownership to no more than 4.99% by June 20, 2019, relinquish governance rights and transfer or sell certain theaters. The affected theaters represented approximately 2% of NCM’s network at year-end; the ultimate network impact was not yet clear.
- Founding-member theater access fees increase annually for digital screens and higher-quality digital cinema equipment, and the per-attendee rate increases 8% in FY2017. These increases may pressure margins.
- Advertising results remain sensitive to theater attendance, film performance, CPMs, inventory utilization, economic conditions, competition from television, online and mobile advertising, and loss of major customers or content partners.
- Approximately 30% of FY2016 revenue came from content partners, public-service-announcement sponsors and founding-member beverage advertising arrangements. Seven of eight content-partner agreements expired in 2017 and one in 2018.
- The tax receivable agreement requires NCM, Inc. to pay founding members 90% of realized tax savings. The recorded payable was approximately $161.8 million at year-end, with $25.3 million paid during FY2016.
- Network-affiliate minimum revenue guarantees had a maximum potential future payment of $39.9 million, although no liability was recorded because expected revenue shares exceeded the guarantees.
- FY2016 included a $2.9 million reversal of an uncertain-tax-position reserve, $3.6 million of CEO transition costs, $18.3 million of share-based compensation and a $0.7 million impairment of an investment.
Most Important Facts to Verify
- Whether FY2017 attendance, advertising impressions and CPM trends offset the scheduled increases in founding-member access fees.
- The effect of AMC’s required ownership reduction and theater transfers on NCM’s screen count, attendance and revenue inventory.
- Debt refinancing and repayment capacity, including the November 2019 maturity of the revolver and term loans and variable-rate exposure.
- The sustainability of dividends given NCM, Inc.’s reliance on NCM LLC distributions, tax receivable agreement payments and negative consolidated equity of $181.2 million.
- Renewal or replacement of content-partner, beverage-advertising and network-affiliate agreements.
- Actual FY2017 capital expenditures and the effectiveness of investments in audience targeting, data management and digital advertising products.