National CineMedia, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 1, 2015. Fiscal 2014 contained 53 weeks; the comparable fiscal 2013 period ended December 26, 2013 and contained 52 weeks. The fourth quarter of fiscal 2014 ended January 1, 2015.
Business Context
National CineMedia, Inc. is a holding company that consolidates National CineMedia, LLC, which operates a digital cinema advertising network. NCM sells on-screen, lobby, online and mobile advertising through long-term exhibitor services agreements with AMC, Cinemark and Regal and agreements with third-party theatre affiliates. NCM, Inc. owned approximately 45.8% of NCM LLC at year-end, with the founding members owning the remainder.
- Network: 20,109 screens in 1,600 theatres, including 16,497 founding-member screens and 3,612 affiliate screens.
- Network attendance: 688.2 million, down 1.6% from 2013.
- Approximately 97% of network attendance was connected to the digital content network.
- NCM LLC sold its Fathom Events business on December 26, 2013; 2014 results therefore primarily reflect advertising.
Financial Performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $394.0 million | $462.8 million | Down 14.9% |
| Advertising revenue | $394.0 million | $426.3 million | Down 7.6% |
| Operating income | $151.7 million | $202.0 million | Down 24.9% |
| Consolidated net income | $65.6 million | $129.8 million | Down 49.5% |
| Net income attributable to NCM, Inc. | $13.4 million | $41.2 million | Down 67.5% |
| Diluted earnings per share | $0.23 | $0.73 | Down 68.5% |
| Adjusted OIBDA | $199.3 million | $234.5 million | Down 15.0% |
| Adjusted OIBDA margin | 50.6% | 50.7% | Essentially stable |
Revenue Detail
- National advertising revenue was $258.8 million, down 12.3%, primarily because national CPMs excluding beverage revenue declined 16.4%. Utilized impressions increased 4.0%.
- Local and regional advertising revenue increased 7.7% to $96.8 million, driven by a 7.9% increase in contract volume.
- Founding-member beverage advertising revenue declined 7.2% to $38.4 million.
- Fathom Events revenue declined to zero from $36.5 million following the divestiture.
- Fourth-quarter revenue was $123.1 million versus $122.7 million in the prior-year quarter. Fourth-quarter net income attributable to NCM, Inc. was $8.1 million versus $19.0 million.
Cash Flow, Liquidity and Capital Structure
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating cash flow | $117.9 million | $153.1 million |
| Investing cash flow | $(3.5) million | $(55.9) million |
| Financing cash flow | $(155.7) million | $(114.9) million |
| Capital expenditures | $8.8 million | $10.6 million |
| Cash, cash equivalents and marketable securities | $80.6 million | $126.0 million |
| Revolver availability | $113.0 million | $104.0 million |
| Total liquidity | $193.6 million | $230.0 million |
- Cash flow available for regular dividends covered 91.0% of the regular dividend requirement in 2014; the $4.7 million shortfall was funded with NCM, Inc. cash and marketable securities.
- Total dividends paid were $81.0 million, including a $29.3 million special dividend. Dividends declared totaled $1.38 per share.
- Total borrowings were $892.0 million, consisting of a $270.0 million term loan, $22.0 million drawn on the revolving facility, $200.0 million of 7.875% senior unsecured notes due 2021 and $400.0 million of 6.00% senior secured notes due 2022.
- The average remaining debt maturity was 6.4 years. Approximately 67% of borrowings carried fixed rates and 33% carried variable rates.
- NCM LLC’s consolidated net senior secured leverage ratio was 3.4 times versus a 6.5-times covenant.
- Management stated that operating cash flow and cash on hand should fund working capital, debt service, capital expenditures and other requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue and reported earnings declined materially because Fathom Events was no longer included and national advertising CPMs weakened.
- The absence of the prior-year $25.4 million gain on the Fathom sale increased the year-over-year decline in pretax income and net income.
- Non-operating expenses increased 46.5% to $76.2 million, including $52.6 million of borrowing interest, $14.6 million of tax receivable agreement interest accretion and $10.0 million of amortization of terminated derivatives.
- Operating expenses declined 7.1%, but merger-related administrative costs of $7.5 million were incurred in 2014.
- NCM, Inc.’s ownership in NCM LLC decreased from 46.1% to 45.8% following the issuance of 1,087,911 NCM LLC units to founding members for additional theatre access rights.
- National inventory utilization improved from 109.3% to 115.7%, but pricing pressure more than offset the increase in utilized impressions.
Guidance, Outlook, Risks and Unusual Items
- Management expected national advertising CPMs to stabilize in 2015, supported by stronger upfront demand.
- National commitments for fiscal 2015 were approximately 74% above the comparable 2014 level and represented approximately 73% of the 2015 national advertising revenue budget. These commitments included cancellation options.
- Upfront bookings for October 1, 2014 through December 31, 2015 were approximately 100% higher than the comparable prior-year booking period, excluding approximately $23 million removed after the DOJ challenged the Screenvision merger.
- Management expected fiscal 2015 capital expenditures of approximately $11 million to $12 million.
- One founding member planned to reduce beverage advertising from 60 seconds to 30 seconds beginning in July 2015 for a six-month test. Management estimated a potential revenue reduction of approximately $2.8 million in the third and fourth quarters of 2015, subject to replacement by other advertisers.
- NCM agreed to acquire Screenvision for $375 million, consisting of $225 million in cash and $150 million in NCM common stock. On November 3, 2014, the Department of Justice filed an antitrust lawsuit seeking to block the transaction; a trial was scheduled for April 13, 2015.
- If specified merger conditions were not satisfied or the transaction was terminated under certain circumstances, NCM could owe a termination payment of approximately $28.8 million. The company had incurred approximately $7.5 million of merger-related costs in 2014 and had no recorded liability for the termination payment at year-end.
- The proposed merger financing included a $250 million term-loan commitment, while the commitment letter and related credit-facility amendments were scheduled to expire April 1, 2015 unless extended.
- Key risks include theatre attendance declines, advertising-market competition, national CPM pressure, dependence on founding-member ESAs, substantial leverage, variable interest rates, technology disruptions, customer concentration in contractual revenue streams and restrictions on cash distributions.
Important Facts for Investors to Verify
- Whether the Screenvision merger was completed, blocked, settled or terminated, including any termination payment and final financing commitments.
- Actual 2015 national advertising CPMs, inventory utilization, upfront commitment conversion and cancellation activity.
- The impact of the founding member’s beverage advertising reduction and the extent to which premium inventory was replaced.
- Cash flow coverage of regular dividends, future dividend decisions and remaining cash available at NCM, Inc. apart from cash held at NCM LLC.
- Debt maturities, variable-rate exposure, covenant compliance and the effect of any merger-related borrowing on leverage.
- Renewal and performance terms of founding-member ESAs and network affiliate agreements, including the $37.0 million maximum potential network affiliate revenue guarantees.
- The sustainability of the approximately 50.6% Adjusted OIBDA margin after excluding merger-related costs and share-based compensation, noting that Adjusted OIBDA is a non-GAAP measure.