Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As discussed in Part 1, some of the information in this Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and statements related to the impact of the current COVID-19 Pandemic on our business and results, may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. The following discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto included elsewhere in this document. In the following discussion and analysis, the term net income refers to net income attributable to NCM, Inc.
This section of this Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-to-year comparisons between fiscal 2020 and fiscal 2019. Discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2019.
Overview
We are America’s Movie Network. As the largest cinema advertising network in the U.S., we unite brands with the power of movies and engage movie fans anytime and anywhere. We currently derive revenue principally from the sale of advertising to national, regional and local businesses in Noovie® , our cinema advertising and entertainment pre-show seen on movie screens across the U.S. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed to address the COVID-19 Pandemic and almost all of the theaters within our network remained closed until late August 2020. On September 4, 2020 the Company resumed in-theater advertising and as of December 31, 2020, 40.5% of the theaters within our network were open. As of March 5, 2021, 49.0% of theaters within our network are open. Refer to the “Recent Developments” section below for further information regarding the impact of and the Company's response to the COVID-19 Pandemic.
We also sell advertising on our LEN, a series of strategically-placed screens located in movie theater lobbies, and other forms of advertising and promotions in theater lobbies. We also sell digital online and mobile advertising through our Noovie Audience Accelerator product and across our suite of Noovie digital properties, including Noovie.com, Noovie Shuffle, Name That Movie and Noovie Arcade , in order to reach entertainment audiences beyond the theater. As of December 31, 2020, approximately 5.1 million moviegoers have downloaded our mobile apps. These downloads and the acquisition of second party data have resulted in first- and second-party data sets of approximately 171.0 million as of December 31, 2020. We have long-term ESAs (approximately 18.7 weighted average years based on pre-COVID-19 attendance levels) with the founding members and multi-year agreements with network affiliates, which expire at various dates between March 31, 2021 and July 22, 2031. The weighted average remaining term (based on pre-COVID-19 attendance levels) of the ESAs and the network affiliate agreements is 16.3 years as of December 31, 2020. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. Our Noovie pre-show and LEN programming are distributed predominantly via satellite through our proprietary DCN.
Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. We focus on many operating metrics including changes in revenue, Adjusted OIBDA and Adjusted OIBDA margin, as defined and discussed in “Notes to the Selected Historical Financial and Operating Data” above, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, national and regional advertising pricing (CPM), local advertising rate per theater per week, national and local and regional and total advertising revenue per attendee. We also monitor free cash flow, the dividend coverage ratio, financial leverage ratio (net debt divided by Adjusted OIBDA plus integration payments and other encumbered theater payments), cash balances and revolving credit facility availability to ensure financial debt covenant compliance and that there is adequate cash availability to fund our working capital needs and debt obligations and current and future dividends declared by our Board of Directors.
Recent Developments
COVID-19 — Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic in March 2020, the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding
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members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. The Company generated no in-theater advertising revenue for the approximate six months that the theaters were closed. Major motion picture releases expected to occur during the temporary closure period were delayed until 2021 or have been released directly to alternative delivery methods bypassing the theater entirely.
On September 4, 2020 the Company resumed advertising within the theaters that were open in our network; however, in-theater advertising revenue continues to be adversely impacted as attendance at the reopened theaters has been much less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases. In October 2020, Regal announced the re-closure of its theaters in the United States. As of December 31, 2020, 40.5% of the theaters within our network had reopened. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance at open theaters has not returned to historical levels. The results of operations for the year ended December 31, 2020 were significantly impacted by the COVID-19 Pandemic.
The Company's ability to advertise has been and will continue to be limited due to the portion of our network that remains closed or has re-closed, reduced movie schedules and patron capacities at many network theaters and the timing and frequency of major motion picture releases as compared to prior years due to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or in-theater advertising revenue, and therefore, were not incurred for the duration of time that the theaters were closed and attendance-based fees will be reduced for the period of time that attendance is lower than historical levels. Even though our ability to generate in-theater advertising revenue will be negatively impacted by government mandated capacity restrictions and the limited new content currently available, we are still required to pay these screen-based fees when theaters are open, which may be reduced for months where screens are in use for only part of the month. We have been working to preserve cash and ensure sufficient liquidity to endure the impacts of the COVID-19 Pandemic, even if prolonged.
During the temporary theater closures, when we were not running advertising, we temporarily furloughed approximately 30% of our staff and temporarily reduced the pay of the remaining employees by up to 50%, which in aggregate reduced our compensation expense by 50% (“Temporary Salary and Wage Reductions”). In response to the reopening of a portion of our network, we brought back most of our staff from furlough and reduced schedules by August 31, 2020. Most of the salary reductions remained in place.
Given the limited attendance levels and expected delay in new movie releases since September 2020, we have continued to re-implement a combination of temporary furloughs, permanent layoffs and further salary reductions. As of the filing date, almost 20% of our current headcount is on furlough, over 20% of our current headcount is on reduced pay and schedules of 50%-60% and almost all remaining employees are at salary reductions of up to 20%. Further, since the start of the COVID-19 Pandemic we have permanently reduced our total headcount by over 20% from pre-COVID-19 Pandemic headcount levels.
Since the start of the COVID-19 Pandemic, we have also taken the following cash preservation actions that the Company anticipates continuing until the Company’s operations normalize:
• Temporarily reduced cash compensation of the Company's Board of Directors by 20%;
• Suspended certain non-essential operating expenditures, including marketing, research, employee travel and consulting services;
• Implemented a hiring freeze on non-essential positions;
• Temporarily suspended the 401K employee match program;
• Terminated or deferred certain non-essential capital expenditures;
• Strategically worked with our vendors, and other business partners to manage, defer, and/or abate certain costs during the disruptions caused by the COVID-19 Pandemic;
• Decreased our quarterly dividend to $0.07 per share for the first three quarters of 2020 and to $0.05 for the fourth quarter of 2020 from $0.19 per share in the fourth quarter of 2019. When compared to the fourth quarter of 2019 this results in a cash savings of $10.9 million in the fourth quarter of 2020 and year to date cash savings of $39.1 million for NCM, Inc.; and
• Introduced an active cash management process, which, among other things, requires CEO approval of all outgoing payments.
The Company's ability to normalize operations is dependent upon the reopening of the remaining theaters within our network, the release of major motion pictures to the theaters, and the attendance of theater patrons. As of the filing date, multiple COVID-19 vaccines have been developed and immunizations have commenced throughout the United States and cases of the COVID-19 virus are decreasing from the peak numbers experienced in late 2020. However, there can be no assurance of
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when theaters within our network will return to normal operations, that the theaters which have reopened will remain open or that patrons will return to the theaters at historical levels.
We believe that the exhibition industry has historically fared well during periods of economic stress, and we remain optimistic, though cannot guarantee, that our founding members and network affiliates will rebound and attendance figures will benefit from pent-up social demand as state and local restrictions or other social distancing orders subside and people seek togetherness with a return to normalcy. However, the ultimate significance of the COVID-19 Pandemic, including the extent of the adverse impact on our financial and operational results, will be dictated by the currently unknowable duration of the pandemic, the effect of the pandemic on the overall economy and the advertising market and responsive governmental regulations, including mandated business closures which could recur after a reopening causing subsequent closure periods, social distancing guidelines, theater capacity restrictions, shifting movie slates, voluntary theater closures and the level of theater attendance. Our business also could be significantly affected should the disruptions caused by the COVID-19 Pandemic lead to changes in consumer behavior (such as the movie audience’s willingness to return to the movie theaters and the impacts of social distancing, facemask requirements and other measures on the movie going experience), or further reductions or impacts to the customary theatrical release window. The COVID-19 Pandemic also makes it more challenging for management to estimate the future performance of our business, particularly over the near to medium term. We are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Financing — In March 2020, we drew down an additional $110.0 million on our revolving credit facility increasing our cash and marketable securities balance to $215.3 million as of March 26, 2020 ($132.2 million at NCM LLC). As of December 31, 2020, our cash and marketable securities balance was $181.8 million ($123.9 million at NCM LLC) and our trade accounts receivable outstanding, net of the allowance for doubtful accounts, was $16.2 million. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. shareholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
On April 30, 2020, NCM LLC amended its Credit Agreement, dated as of June 20, 2018 (“Credit Agreement Amendment”) to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter ending June 25, 2020 until and including the quarter ending July 1, 2021 (the “Covenant Holiday Period”). The Credit Agreement Amendment requires that, until the fiscal quarter ending July 1, 2021, NCM LLC must not permit the sum of unrestricted cash on hand at NCM LLC and availability under its revolving credit facility to be less than $55.0 million. Further, NCM LLC can make available cash distributions to its members (AMC, Cinemark, Regal and NCM, Inc.) during the Covenant Holiday Period only if trailing 12-month consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds $277.0 million and outstanding loans under the revolving credit facility are equal to or less than $39.0 million. NCM LLC can make available cash distributions to its members outside of the Covenant Holiday Period so long as NCM LLC’s consolidated net senior secured leverage ratio is equal to or less than 5.00 to 1.00 and no default or event of default under the Credit Agreement has occurred and is continuing. NCM LLC may continue to reimburse NCM, Inc. for its services provided under the management services agreement during the period of the automatic waiver.
On March 8, 2021, NCM LLC entered into an additional amendment to its Credit Agreement, dated as of June 20, 2018 (“Credit Agreement Second Amendment”). Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants; (ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter ended June 30, 2022; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception. The Credit Agreement Second Amendment also: (i) grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders (the “Additional Collateral”) and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%. Additionally, pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less.
In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC will incur new incremental term loans (the “New Incremental Loans”) in an aggregate principal amount of $50.0 million, the proceeds of which will be used for general corporate purposes. The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Second Amendment), except that the New Incremental Loans will: (i) have a cash interest
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rate of LIBOR plus 8.00%, (ii) have a maturity of December 20, 2024, and (iii) be subject to prepayment premiums if NCM LLC prepays the New Incremental Loans before maturity.
In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement, NCM LLC concurrently entered into an amendment to the Security Agreement, dated as of October 8, 2019 made by NCM LLC, as issuer, in favor of JPMorgan Chase Bank, N.A., as collateral agent, relating to that certain Indenture, dated as of October 8, 2019, between NCM LLC, as issuer and Wells Fargo Bank, National Association, as trustee, relating to NCM LLC’s Senior Secured Notes due 2028. This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes.
Taxes — On March 27, 2020, the U.S. Government enacted various relief and stimulus measures in response to the unprecedented adverse economic impacts of the COVID-19 Pandemic commonly referred to as the CARES Act. We currently have recognized or expect to recognize the following benefits under the CARES Act:
• Deferral of the payment of the 6.2% FICA portion of Company’s payroll taxes beginning on the enactment date through December 31, 2020 until the end of 2021 for one-half of the tax and the remaining half to the end of 2022. The Company deferred $1.3 million in qualifying payments in the year ended December 31, 2020, respectively; and
• A refundable Employee Retention Payroll Tax Credit for the Company’s portion of the 6.2% FICA payroll tax for certain qualifying employees from March 13, 2020 through December 31, 2020.
The Company will continue to monitor the provisions of the CARES Act and associated regulations and any other government action and intends to seek available potential benefits that would positively impact the Company.
Due to the impact of the COVID-19 Pandemic on the Company’s operations in 2020 and expected continued impact in 2021, the Company expects that it will generate a three-year cumulative pre-tax book loss during 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis of the realizability of its deferred tax assets, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. The Company increased the valuation allowance against certain deferred tax assets, generating $139.0 million of additional income tax expense in the year ended December 31, 2020. The Company recorded a corresponding $151.9 million reduction to the ‘Payable to founding members under the tax receivable agreement’ equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020. The reduction to the payable to founding members under the tax receivable agreement was recorded as a gain of $151.9 million within non-operating income within the Consolidated Statements of Income. Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to founding members under the tax receivable agreement which would increase to reflect future payments to the founding members at that time.
Summary Historical and Operating Data
You should read this information in conjunction with the other information contained in this document, and our audited historical financial statements and the notes thereto included elsewhere in this document.
Our Operating Data —The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data). Refer to “Item 6. Selected Financial Data—Notes to the Selected Historical Financial and Operating Data” for a discussion of the calculation of Adjusted OIBDA and reconciliation to operating income.
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Years Ended % Change
($ in millions) Dec. 31,
2020 Dec. 26,
2019 2019 to 2020
Revenue $ 90.4 $ 444.8 (79.7) %
Operating expenses:
Advertising 61.9 177.8 (65.2) %
Network, administrative and unallocated costs 89.5 105.7 (15.3) %
Total operating expenses 151.4 283.5 (46.6) %
Operating (loss) income (61.0) 161.3 (137.8) %
Non-operating (income) expense (96.9) 62.2 (255.8) %
Income tax expense 162.2 12.4 1208.1 %
Net (loss) income attributable to noncontrolling interests (60.9) 50.6 (220.4) %
Net (loss) income attributable to NCM, Inc. $ (65.4) $ 36.1 (281.2) %
Net (loss) income per NCM, Inc. basic share $ (0.84) $ 0.47 (278.7) %
Net (loss) income per NCM, Inc. diluted share $ (0.84) $ 0.46 (282.6) %
Adjusted OIBDA $ (19.4) $ 207.5 (109.3) %
Adjusted OIBDA margin (21.5) % 46.7 % (68.2) %
Total theater attendance (in millions) (1)
138.2 651.4 (78.8) %
(1) Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters that are currently part of another cinema advertising network for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
Our Network —The net screens added to our network by the founding members and network affiliates during 2020 were as follows.
Number of screens
Founding Members Network Affiliates Total
Balance as of December 26, 2019 16,880 4,328 21,208
Lost affiliates, net of new affiliates (1)
— (193) (193)
Closures, net of openings (2)
(365) (200) (565)
Balance as of December 31, 2020 16,515 3,935 20,450
(1) Represents the loss of five of our affiliates that did not renew their contracts resulting in a reduction of 203 affiliate screens to our network, offset by the addition of two new affiliates which added 10 new screens to our network during the year ended December 31, 2020.
(2) Excludes temporary theater closures in response to the COVID-19 Pandemic.
Our founding member and network affiliate agreements allow us to sell cinema advertising across the largest network of digitally equipped theaters in the U.S. We believe that our market coverage strengthens our selling proposition and competitive positioning against other national, regional and local video advertising platforms, including television, online and mobile video platforms and other out of home video advertising platforms by allowing advertisers the broad reach and national scale that they need to effectively reach their target audiences.
Basis of Presentation
Prior to the completion of our IPO, NCM LLC was wholly-owned by its founding members. In connection with the offering, NCM, Inc. purchased newly issued common membership units from NCM LLC and common membership units from NCM LLC’s founding members and became a member of and the sole manager of NCM LLC. We entered into several
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agreements to effect the reorganization and the financing transaction and certain amendments were made to the existing ESAs to govern the relationships among NCM LLC and NCM LLC’s founding members after the completion of these transactions.
The results of operations data discussed herein were derived from the audited Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the notes thereto.
We have a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal year 2019 contained 52 weeks and fiscal year 2020 contained 53 weeks. Our 2021 fiscal year will contain 52 weeks. Throughout this document, we refer to our fiscal years as set forth below:
Reference in
Fiscal Year Ended this Document
December 31, 2020 2020
December 26, 2019 2019
Results of Operations
Fiscal Years 2020 and 2019
Revenue . Total revenue decreased $354.4 million, or 79.7%, from $444.8 million for 2019 to $90.4 million for 2020. The following is a summary of revenue by category (in millions):
Fiscal Year $ Change % Change
2020 2019 2019 to 2020 2019 to 2020
National and regional advertising revenue $ 66.7 $ 348.9 $ (282.2) (80.9) %
Local advertising revenue 17.5 66.9 (49.4) (73.8) %
Founding member advertising revenue from beverage
concessionaire agreements 6.2 29.0 (22.8) (78.6) %
Total revenue $ 90.4 $ 444.8 $ (354.4) (79.7) %
The following table shows data on revenue per attendee for 2020 and 2019:
Fiscal Year % Change
2020 2019 2019 to 2020
National and regional advertising revenue per attendee $ 0.483 $ 0.536 (9.9) %
Local advertising revenue per attendee $ 0.127 $ 0.103 23.3 %
Total advertising revenue (excluding founding member
beverage revenue) per attendee $ 0.609 $ 0.638 (4.6) %
Total advertising revenue per attendee $ 0.654 $ 0.683 (4.2) %
Total theater attendance (in millions) (1)
138.2 651.4 (78.8) %
(1) Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
National and regional advertising revenue. The $282.2 million, or 80.9%, decrease in national and regional advertising revenue (excluding beverage revenue from founding members) was primarily due to an 80.8% decrease in impressions sold due to the temporary closure of almost all the theaters within our network in response to the COVID-19 Pandemic preventing the Company from displaying in-theater advertising beginning in mid-March 2020 until the beginning of September 2020. Nearly 60% of our network remained closed and attendance was significantly below historical levels at the open theaters through the rest of 2020. National advertising CPMs for the impressions delivered for the portion of the year ended December 31, 2020 the theaters were open decreased 17.2% driven by a change in the mix of clients with a higher proportion of upfront clients and fewer higher CPM scatter market and content partner clients in the year ended December 31, 2020, as compared to the year ended December 31, 2019. The scatter market represents inventory not included within an upfront or content partner commitment sold closer to the advertisement air date for typically higher CPMs.
Local advertising revenue. The $49.4 million, or 73.8%, decrease in local advertising revenue was primarily due to the temporary closure of almost all the theaters within our network in response to the COVID-19 Pandemic preventing the Company from displaying in-theater advertising beginning in mid-March 2020 until the beginning of September 2020.
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Nearly 60% of our network remained closed and attendance was significantly below historical levels at the open theaters through the rest of 2020.
Founding member beverage revenue. The $22.8 million, or 78.6%, decrease in national advertising revenue from the founding members’ beverage concessionaire agreements was primarily due to a 79.0% decrease in founding member attendance for the year ended December 31, 2020, as compared to the year ended December 26, 2019, due to the temporary theater closures described above related to the COVID-19 Pandemic and fewer theaters open in our network through the end of 2020.
Operating expenses. Total operating expenses decreased $132.1 million, or 46.6%, from $283.5 million for 2019 to $151.4 million for 2020. The following table shows the changes in operating expense for 2019 and 2020 (in millions):
Fiscal Year $ Change % Change
2020 2019 2019 to 2020 2019 to 2020
Advertising operating costs $ 10.3 $ 38.3 $ (28.0) (73.1) %
Network costs 8.6 13.5 (4.9) (36.3) %
Theater access fees and revenue share—founding members 24.6 82.7 (58.1) (70.3) %
Selling and marketing costs 37.6 64.9 (27.3) (42.1) %
Administrative and other costs 30.9 43.8 (12.9) (29.5) %
Impairment of long-lived assets 1.7 — 1.7 100.0 %
Depreciation expense 13.1 13.6 (0.5) (3.7) %
Amortization of intangibles recorded for network theater screen leases 24.6 26.7 (2.1) (7.9) %
Total operating expenses $ 151.4 $ 283.5 $ (132.1) (46.6) %
Advertising operating costs . Advertising operating costs decreased $28.0 million, or 73.1%, from $38.3 million for the year ended December 26, 2019 to $10.3 million for the year ended December 31, 2020. The decrease was due to a $26.5 million decrease in advertising affiliate expense due to lower revenue in 2020 due to the COVID-19 Pandemic, a $1.0 million decrease in personnel related expenses primarily due to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic and a $0.4 million decrease in onscreen production expense related to the corresponding lower revenue in 2020, compared to 2019.
Network costs. Network costs decreased $4.9 million, or 36.3%, from $13.5 million for the year ended December 26, 2019 to $8.6 million for the year ended December 31, 2020. The decrease was primarily related to a $3.7 million decrease in personnel related expenses related to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic, a $0.6 million decrease in maintenance expense primarily related to our DCN due to the temporary closures of theaters within our network in response to the COVID-19 Pandemic and a $0.3 million decrease related to non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic.
Theater access fees and revenue share—founding members. Theater access fees and revenue share decreased $58.1 million, or 70.3%, from $82.7 million for the year ended December 26, 2019 to $24.6 million for the year ended December 31, 2020. The decrease was primarily due to a 79.0% decrease in founding member attendance for the year ended December 31, 2020, as compared to year ended December 26, 2019, and fewer active founding member screens due to the temporary closure of founding member theaters in response to the COVID-19 Pandemic. The Company did not owe the founding members any theater access fees for the period the theaters were not open. This decrease was partially offset by $1.8 million of higher expense in the year ended December 31, 2020 related to fees owed to Cinemark and Regal as compensation for post-showtime advertising in accordance with the 2019 ESA Amendments.
Selling and marketing costs. Selling and marketing costs decreased $27.3 million, or 42.1%, from $64.9 million for the year ended December 26, 2019 to $37.6 million for the year ended December 31, 2020. This decrease was primarily related to a $16.4 million decrease in personnel related expenses primarily due to a decrease in commission and bonus expense from the revenue declines during 2020, as compared to 2019, as well as other lower personnel related expenses related to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic. Selling and marketing costs also decreased 1) $5.8 million related to non-essential operating expenditures, including marketing, research, consulting and employee travel that were suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic, 2) $2.0 million due to a decrease in barter expense in 2020, compared to 2019, 3) $2.0 million due to non-cash impairment expense realized in the third quarter of 2019 related to investments obtained in prior years in exchange for advertising services and 4) $1.8 million due to a decrease in bad debt expense
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and production and royalty related costs resulting from lower revenue in 2020, compared to 2019. These decreases were partially offset by a $1.8 million increase in expense associated with our Noovie® Audience Accelerator service offering in 2020, compared to 2019.
Administrative and other costs. Administrative and other costs decreased $12.9 million, or 29.5%, from $43.8 million for the year ended December 26, 2019 to $30.9 million for the year ended December 31, 2020. Administrative and other costs decreased primarily due to a $9.6 million decrease in personnel related expenses due to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic and a decrease in performance-based compensation expense related to lower projected performance against internal bonus and performance-based restricted stock targets as of December 31, 2020, as compared to December 26, 2019. Administrative and other costs also decreased 1) $1.5 million due to a decrease in consulting services, 2) $0.8 million due to a decrease in non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic and 3) $0.4 million due to a decrease in CEO transition fees related to costs incurred in the year ended December 26, 2019.
Impairment of long-lived assets. Impairment of long-lived assets increased $1.7 million, or 100.0%, from $0.0 million in the year ended December 26, 2019 to $1.7 million in the year ended December 31, 2020. This increase in impairment expense was primarily related to the write-off of certain long-lived assets during the year ended December 31, 2020.
Depreciation expense. Depreciation expense decreased $0.5 million, or 3.7%, from $13.6 million for the year ended December 26, 2019 to $13.1 million for the year ended December 31, 2020, as assets became fully depreciated.
Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen leases decreased $2.1 million, or 7.9%, from $26.7 million for the year ended December 26, 2019, to $24.6 million for the year ended December 31, 2020, primarily due to the four-year extension of the contractual life of the intangible assets for Cinemark and Regal following the 2019 ESA Amendments at the end of the third quarter of 2019.
Non-operating (income) expense. Total non-operating income increased $159.1 million, or 255.8%, from non-operating expense of $62.2 million in 2019 to non-operating income of $96.9 million in 2020. The following table shows the changes in non-operating (income) expense for 2020 and 2019 (in millions):
Fiscal Year $ Change % Change
2020 2019 2019 to 2020 2019 to 2020
Interest on borrowings $ 55.8 $ 58.0 $ (2.2) (3.8) %
Interest income (0.6) (2.1) 1.5 (71.4) %
Loss on modification and retirement of debt, net 0.4 5.6 (5.2) NM
(Gain) loss on re-measurement of the payable to
founding members under the tax receivable
agreement (152.7) 1.1 (153.8) NM
Other non-operating expense (income) 0.2 (0.4) 0.6 150.0 %
Total non-operating (income) expense $ (96.9) $ 62.2 $ (159.1) (255.8) %
NM = Not meaningful.
The increase in non-operating income from non-operating expense was due primarily to 1) the $153.8 million increase in the gain on the re-measurement of the payable to the founding members which was due primarily to the decrease in our payable to the founding members under the tax receivable agreement resulting from an increase in the valuation allowance against certain of our deferred tax assets, 2) a $5.2 million decrease in the loss on modification and retirement of debt, net related to a loss incurred in the fourth quarter of 2019 upon the early retirement of our Notes due 2022 and 3) a $2.2 million decrease in interest on borrowings due to a 0.65% decrease in the weighted average interest rate, partially offset by an increase in the weighted average balance of debt outstanding for the year ended December 31, 2020, compared to the year ended December 26, 2019. These decreases in non-operating expense were partially offset by a $1.5 million decrease in interest income on the Company's marketable securities due to a decrease in the outstanding balance of the underlying securities and a decrease in the rate of return.
Income tax expense. Income tax expense increased $149.8 million primarily related to an increase in the valuation allowance against certain of our deferred income tax assets recognized as of December 31, 2020 as discussed within the ' Recent Developments ' section.
Net loss. Net loss increased $101.5 million from net income of $36.1 million for the year ended December 26, 2019 to net loss of $65.4 million for the year ended December 31, 2020. The increase in net loss was due to a $222.3 million increase in
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operating loss and a $149.8 million increase in income tax expense, partially offset by a $159.1 million decrease in non-operating expenses and a $111.5 million increase in net loss attributable to noncontrolling interests.
Known Trends and Uncertainties
COVID-19— As discussed within the ' Recent Developments ' section, due to the COVID-19 Pandemic, the Company was unable to advertise in the theaters, and thus unable to generate the majority of its revenue, for the approximate six months of 2020 that the theaters were closed. The Company's ability to advertise within the reopened theaters has been and will continue to be limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of new major motion picture releases as compared to prior years due to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or revenue, and therefore, are not incurred when theaters are closed and attendance-based fees will be reduced for the period of time that attendance is lower than historical levels.
Due to the rapidly changing business environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 Pandemic, we are currently unable to fully determine the extent of the COVID-19 Pandemic’s impact on our business in future periods. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Beverage Revenue —Under the ESAs, up to 90 seconds of the Noovie® pre-show program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. For the years ended 2020 and 2019, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds to satisfy their obligations under their beverage concessionaire agreements. The founding members’ current long-term contracts with their beverage suppliers require the 30 or 60 seconds of beverage advertising, although such commitments could change in the future. Per the ESA with AMC, the time sold to the founding member beverage supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of the Noovie pre-show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC. The CPM on our beverage concessionaire revenue related to AMC in 2021 will not change compared to 2020. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers will instead increase at a fixed rate of 2.0% each year.
Theater Access Fees —In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron and a fixed payment per digital screen (connected to the DCN). The payment per theater patron increases by 8% every five years, with the next increase occurring in fiscal year 2022. Pursuant to the ESAs, the payment per digital screen increases annually by 5%. Pursuant to the 2019 ESA Amendments, Cinemark and Regal each receive an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron beginning at $0.025 per patron on November 1, 2019, (ii) $0.0375 per patron beginning on November 1, 2020, (iii) $0.05 per patron beginning on November 1, 2021, (iv) $0.052 per patron beginning on November 1, 2022 and (v) increasing 8% every five years beginning November 1, 2027.
Platinum Spot —In consideration for the utilization of the theaters post-showtime for Platinum Spots, Cinemark and Regal are entitled to receive 25% of all revenue generated for the actual display of Platinum Spots in their applicable theaters, subject to a specified minimum. If NCM LLC runs advertising in more than one concurrent advertisers’ Platinum Spot for any portion of the network over a period of time, NCM LLC will be required to satisfy a minimum average CPM for that period of time.
Financial Condition and Liquidity
Liquidity
Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as available cash payments (as defined in the NCM LLC Operating Agreement) to Cinemark and Regal, interest or principal payments on our term loan and the Notes due 2026 and Notes due 2028, income tax payments, TRA payments to the founding members and the amount of quarterly dividends to NCM, Inc.’s common stockholders.
As discussed within the ‘Recent Developments’ section, due to the COVID-19 Pandemic, the Company was unable to advertise in the theaters, and thus generate the majority of its revenue, for the approximate six months that the theaters were generally closed and many theaters in our network remain closed. The Company’s ability to advertise within the reopened
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theaters has been and will continue to be limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of major motion picture releases as compared to prior years due to the COVID-19 Pandemic. The Company will have limited cash receipts until the full network of theaters reopen, major motion pictures are released and theater patrons feel comfortable returning to the theaters allowing attendance levels to normalize. Further, once the above conditions are met there will be a lag between when revenue is generated and when the Company ultimately collects the associated accounts receivable balance. The Company also has reduced cash payments during the period theaters within the Company's network are closed or attendance levels are low as expenses related to theater attendance are either not incurred or incurred at lower levels (i.e. theater access fees, Platinum Spot revenue share and network affiliate revenue share payments). The Company also implemented a number of cost-saving measures in order to preserve cash as further outlined within the ‘Recent Developments’ section above. In March 2020, we drew down an additional $110.0 million on our revolving credit facility. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. shareholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
In accordance with the Credit Agreement Amendment and Credit Agreement Second Amendment, for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the third quarter of 2022, NCM LLC must maintain a total balance of $55.0 million of a combination of unrestricted cash on hand and availability under NCM LLC's revolving credit facility. As of December 31, 2020, NCM LLC was in compliance with the requirements of the Credit Agreement, as amended. Management believes the Company can meet its obligations, including all working capital requirements, interest and debt service payments and capital expenditures within the twelve months following the date of issuance of the accompanying financial statements, based on its current financial position and liquidity sources, including current cash balances, the additional proceeds under the term loan and forecasted future cash flows.
A summary of our financial liquidity is as follows (in millions)
Years Ended $ Change
December 31, 2020 December 26, 2019 2019 to
2020
Cash, cash equivalents and marketable securities (1)
$ 181.8 $ 80.9 $ 100.9
Revolver availability (2)
4.4 132.4 (128.0)
Total liquidity $ 186.2 $ 213.3 $ (27.1)
(1) Included in cash and cash equivalents as of December 31, 2020 and December 26, 2019 there was $123.9 million and $11.4 million, respectively, of cash held by NCM LLC which is not available to satisfy NCM, Inc.'s dividend payments and other NCM, Inc. obligations.
(2) The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the Senior Secured Credit Facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility was $175.0 million as of December 31, 2020 and December 26, 2019. As of December 31, 2020 and December 26, 2019, the amount available under the NCM LLC revolving credit facility in the table above, was net of the amount outstanding under the revolving credit facility of $167.0 million and $39.0 million, respectively, and net letters of credit of $3.6 million and $3.6 million, respectively.
We have generated and used cash as follows (in millions):
Years Ended
2020 2019
Operating cash flow $ 55.3 $ 143.6
Investing cash flow $ 15.6 $ 1.6
Financing cash flow $ 53.5 $ (130.7)
Cash Flows – Fiscal Years 2020 and 2019
Operating Activities. The $88.3 million decrease in cash provided by operating activities for 2020, compared to 2019 was primarily due to 1) a $213.0 million decrease in consolidated net income due the temporary closure of almost all the theaters within our network in response to the COVID-19 Pandemic during the period, 2) a $22.1 million larger decrease in accounts payable and accrued expenses during 2020 as compared to 2019, related to the decrease in operating expenses for the corresponding periods as described above, 3) a $11.9 million decrease in founding member integration and other encumbered theater payments, 4) a $6.2 million decrease in amounts due to founding members, 5) a $5.2 million decrease on the loss on modification and retirement of debt, and 6) a $3.5 million increase in the noncash gain on the remeasurement of the payable to
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founding members under the TRA, net of the increase in income tax expense, as described above, for 2020, compared to 2019. These decreases in cash provided by operating activities were partially offset by $178.9 million larger decrease in the accounts receivable balance during 2020, as compared to 2019, related to the collection of the accounts receivable balance and the decrease in revenue described above.
Investing Activities. The $14.0 million increase in cash provided by investing activities for 2020, compared to 2019 was primarily due to a $13.6 million decrease in the purchase of marketable securities, net of proceeds and a $6.0 million decrease in purchases of property and equipment in 2020, compared to 2019 driven by the Company's measures to preserve cash in response to the COVID-19 Pandemic, partially offset by a $5.6 million decrease in proceeds from the founding member notes receivable.
Financing Activities. The $184.2 million increase in cash provided by financing activities for 2020, compared to 2019 was primarily due to a $116.0 million increase in proceeds from our revolving credit facility, net of repayments made early in 2020, in order to fund operations during the period of expected reduced cash flows due to the temporary closure of the theaters within NCM LLC's network to address the COVID-19 Pandemic. The increase was also due to a $21.6 million decrease in dividends paid related to the decrease in the dividend amounts declared from $0.68 per share during 2019 to $0.40 per share during 2020, a $35.1 million decrease in distributions to founding members in 2020, compared to 2019 and an $8.6 million increase related to the repurchase and repayment of the Notes due 2022 and the retired Notes due 2026, net of the issuance of the Notes due 2028.
Sources of Capital and Capital Requirements
NCM, Inc.’s primary source of liquidity and capital resources is the quarterly available cash distributions from NCM LLC as well as its existing cash balances and marketable securities, which as of December 31, 2020 were $181.8 million (excluding $123.9 million of cash held by NCM LLC). NCM LLC’s primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its revolving credit facility and cash on hand. NCM LLC drew down an additional $110.0 million of its revolving credit facility in March 2020 in order to supplement the decrease in cash provided by operating activities during the period our network theaters are closed. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is used to fund income taxes, payments associated with the TRA with the founding members and for future payment of dividends to NCM, Inc. shareholders. Refer to Note 10 to the audited Consolidated Financial Statements included elsewhere in this document and “Financings” below for a detailed discussion of the debt transactions in 2019 and 2020 and the debt outstanding as of December 31, 2020.
Cash flows generated by NCM LLC’s distributions to NCM, Inc. and the founding members will be impacted by the temporary closure of our network theaters and may be deferred through the quarter ending September 29, 2022 or longer due to the limitations instituted by the Credit Agreement Amendment and Credit Agreement Second Amendment. NCM LLC is required pursuant to the terms of the NCM LLC Operating Agreement to distribute its available cash, as defined in the operating agreement, unless prohibited by NCM LLC's Credit Agreement, quarterly to its members (Regal, Cinemark, AMC and NCM, Inc.). The available cash distribution to the members of NCM LLC for the combined three months ended June 25, 2020, three months ended September 24, 2020 and three months ended December 31, 2020 was calculated as approximately negative $85.9 million, of which NCM, Inc.'s share is approximately negative $41.2 million. Pursuant to the NCM LLC Operating Agreement and the Credit Agreement Amendment, there will be no available cash distributions made for the fourth quarter of 2020. These negative available cash distributions for 2020 are expected to be netted in accordance with the NCM LLC Operating Agreement against future positive available cash distributions after the Extended Covenant Waiver Holiday.
NCM, Inc. expects to use its cash balances and cash received from future available cash distributions to fund payments associated with the TRA with the founding members and current and future dividends as declared by the Board of Directors, including a dividend declared on March 8, 2021 of $0.05 per share (approximately $3.9 million) on each share of the Company’s common stock (not including outstanding restricted stock) to stockholders of record on March 22, 2021 to be paid on April 5, 2021. The Company will pay Cinemark, Regal and AMC $0.2 million, $0.4 million, and $0.3 million, respectively, in the first quarter of 2021 as the final payments pursuant to the TRA for the 2019 tax year. The Company does not expect to make a TRA payment in 2021 for the 2020 tax year. The Company will also consider opportunistically using cash received for partial repayments of NCM LLC's outstanding debt balance, while ensuring the Company's financial flexibility is maintained. Distributions from NCM LLC and NCM, Inc. cash balances should be sufficient to fund payments associated with the TRA with the founding members, income taxes and its regular dividend for the foreseeable future at the discretion of the Board of Directors. The Company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the Company’s intention to distribute substantially all its free cash flow to stockholders through its quarterly dividend. The declaration, payment, timing and amount of any future dividends payable will be at the sole discretion of the Board of Directors who will take into account general economic and advertising market business conditions, the Company’s financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant, which includes short-term and long-term impacts to the Company related to the COVID-19 Pandemic and restrictions under the NCM LLC Credit Agreement.
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Capital Expenditures
Capital expenditures of NCM LLC include digital applications being developed primarily by our programmers and outside consultants, capitalized software development or upgrades for our Digital Content Software and advertising proposal and inventory management, audience targeting and data management systems, equipment required for our Customer Experience Center and content production and post-production facilities, office leasehold improvements, desktop equipment for use by our employees, and in certain cases, the costs necessary to install equipment at or digitize all or a portion of a network affiliate’s theaters when they are added to our network. Capital expenditures in 2020 were $11.2 million (including $4.6 million associated with digital product development; $2.4 million associated with certain implementation and prepaid costs associated with Cloud Computing arrangements; $2.0 million associated with upgrades to our existing systems related to the planned upgrade of our end-to-end order management and scheduling system; and $0.2 million associated with network affiliate additions) compared to $15.3 million (including $7.6 million associated with digital product development; $2.0 million associated with certain implementation and prepaid costs associated with Cloud Computing Arrangements related to the planned upgrade of our end-to-end order management and scheduling system; and $0.8 million associated with network affiliate additions) for the 2019 period. The capital expenditures have typically been satisfied through cash flow from operations. All capital expenditures related to the DCN within the founding members’ theaters have been made by the founding members under the ESAs. We expect they will continue to be made by the founding members in accordance with the ESAs.
We expect to make approximately $8.0 million to $9.0 million of capital expenditures in fiscal 2021, including approximately $3.3 million for digital product development. We expect these digital products to allow us to capture exclusive first party data on our movie audiences and build our own foundational capabilities for digital ad buying, selling and serving. We also expect approximately $2.3 million of capital expenditures related to upgrades to our Digital Content Software distribution and content management software and our other internal management systems, including our proposal, inventory and data management systems, reporting systems, network equipment related to currently contracted network affiliate theaters, server and storage upgrades and software licensing. Our capital expenditures may increase as we add additional network affiliates. We expect that additional expenditures, if any, would be funded in part by additional cash flows associated with those new network affiliates.
Financings
On March 8, 2021, NCM LLC entered into an additional amendment to its Credit Agreement, dated as of June 20, 2018. Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants;(ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter ended June 30, 2022; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception. The Credit Agreement Second Amendment also: (i) grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%. Additionally, pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less.
In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC will incur new incremental term loans in an aggregate principal amount of $50.0 million, the proceeds of which will be used for general corporate purposes. The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Amendment), except that the New Incremental Loans will: (i) have a cash interest rate of LIBOR plus 8.00%, (ii) have a maturity of December 20, 2024, and (iii) be subject to prepayment premiums if the Borrower prepays the New Incremental Loans before maturity.
In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement, NCM LLC concurrently entered into an amendment to the Security Agreement, dated as of October 8, 2019 made by NCM LLC, as issuer, in favor of JPMorgan Chase Bank, N.A., as collateral agent, relating to that certain Indenture, dated as of October 8, 2019, between NCM LLC, as issuer and Wells Fargo Bank, National Association, as trustee, relating to NCM LLC’s Senior Secured Notes due 2028. This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes.
On April 30, 2020, NCM LLC entered into the Credit Agreement Amendment to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter ending June 25, 2020 until and including the quarter ending July 1, 2021. The Credit Agreement Amendment requires that, until the fiscal quarter ending July 1, 2021, NCM LLC must not permit the sum of unrestricted cash
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on hand at NCM LLC and availability under its revolving credit facility to be less than $55.0 million. Further, NCM LLC can make available cash distributions to its members (AMC, Cinemark, Regal and NCM, Inc.) during the Covenant Holiday Period only if trailing 12-month Consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds $277.0 million and outstanding loans under the revolving credit facility are equal to or less than $39.0 million. NCM LLC can make available cash distributions to its members outside of the Covenant Holiday Period so long as NCM LLC’s Consolidated Net Senior Secured Leverage Ratio is equal to or less than 5.00 to 1.00 and no default or event of default under the Credit Agreement has occurred and is continuing. As of December 31, 2020, NCM LLC was in compliance with the requirements of the Credit Agreement Amendment.
On October 8, 2019, NCM LLC completed a private offering of $400.0 million aggregate principal amount of 5.875% senior secured notes due 2028. The 2028 Notes will mature on April 15, 2028. Interest on the 2028 Notes accrues at a rate of 5.875% per annum and is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020. NCM LLC will pay interest to those persons who were holders of record at the close of business on the April 1 and October 1 immediately preceding the interest payment date. At any time prior to April 15, 2023, NCM LLC may redeem all or any portion of the 2028 Notes at a redemption price equal to 100% of the principal amount plus a make-whole premium, plus accrued and unpaid interest, if any, to the redemption date. On or after April 15, 2023, NCM LLC may redeem all or any portion of the 2028 Notes at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to April 15, 2023, NCM LLC may on any one or more occasions redeem up to 35% of the original aggregate principal amount of the 2028 Notes from the net proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the original aggregate principal amount of the 2028 Notes remains outstanding after each such redemption and the redemption occurs within 90 days after the closing of such applicable equity offering.
On November 7, 2019, NCM LLC redeemed the entire $400.0 million aggregate principal amount of NCM LLC’s existing Notes due 2022. The redemption price for the Notes due 2022 was 101.000% of the principal amount thereof plus accrued and unpaid interest thereon, to but not including the redemption date.
In June 2018, we entered into a credit agreement to replace NCM LLC's previous senior secured credit facility. Consistent with the structure of the previous facility, the new credit agreement consists of a term loan facility and a revolving credit facility for $270.0 million and $175.0 million, respectively. The new agreement extended the maturity dates by 5.5 years to June 20, 2025 for the term loan facility and 3.5 years to June 20, 2023 for the revolving credit facility. The interest rate under the term loan facility is either the LIBOR index plus 3.00% or the base rate plus 2.00% and the rate under the revolving credit facility is either the LIBOR index plus an applicable margin ranging from 1.75%-2.25% or the base rate plus an applicable margin ranging from 0.75%-1.25%. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC. As of December 31, 2020, NCM LLC’s senior secured credit facility consisted of a $175.0 million revolving credit facility and a $266.6 million term loan, following NCM LLC's required principal amortization payments of $6.7 million which reduced the outstanding balance to $263.3 million from $270.0 million.
NCM LLC repurchased and canceled a total of $0.0 million and $5.0 million of the Notes due 2026 during 2020 and 2019, respectively, reducing the principal amount to $230.0 million as of December 31, 2020. These repurchases were treated as partial debt extinguishments and resulted in the realization of a non-operating gain, net of written off debt issuance costs, of $0.0 million and $0.3 million during the years ended December 31, 2020 and December 26, 2019, respectively. As of December 31, 2020 re-purchases to date are expected to result in interest savings to maturity of approximately $8.9 million.
As of December 31, 2020, the weighted average remaining maturity was 5.5 years. As of December 31, 2020, approximately 59% of our total borrowings bear interest at fixed rates. The remaining 41% of our borrowings bear interest at variable rates and as such, our net income and earnings per share could fluctuate with market interest rate fluctuations that could increase or decrease the interest paid on our borrowings.
Critical Accounting Policies
The significant accounting policies of the Company are described in Note 1 to the audited Consolidated Financial Statements included elsewhere in this document. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances and are evaluated on an ongoing basis. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Allowance for Doubtful Accounts
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Nature of Estimates Required. The allowance for doubtful accounts represents management’s estimate of probable credit losses inherent in its trade receivables, which represent a significant asset on the balance sheet. Estimating the amount of the allowance for doubtful accounts requires significant judgment and the use of estimates related to the amount and timing of estimated losses based on historical loss experience, consideration of current economic trends and conditions and debtor-specific factors, all of which may be susceptible to significant change. Amounts deemed uncollectible within the account receivable balance are charged against the allowance, while recoveries of amounts previously charged are credited to the allowance. A provision for bad debt is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. To the extent actual outcomes differ from management estimates, additional provision for bad debt could be required that could adversely affect earnings or financial position in future periods.
Sensitivity Analysis. As of December 31, 2020, our allowance for doubtful accounts was $2.3 million, or 12.5% of the gross accounts receivable balance. A 10% difference in the allowance for doubtful accounts as of December 31, 2020 would have affected net income attributable to NCM, Inc. by approximately $0.2 million.
Share-Based Compensation
Nature of Estimates Required. NCM, Inc.’s 2020 Omnibus Equity Incentive Plan, 2016 Equity Incentive Plan and its 2007 Equity Incentive Plan, as amended (the “Equity Incentive Plans”) are treated as equity plans under the provisions of Accounting Standards Codification ASC 718 – Compensation – Stock Compensation, and the determination of fair value of options, restricted stock and restricted stock units for accounting purposes requires that management make estimates and judgments. Stock options are granted using the Black-Scholes option pricing model to estimate the fair value of stock option grants, which was affected by our stock price and a number of assumptions, including expected term, expected volatility, risk-free interest rate and expected dividends.
The fair value of restricted stock and restricted stock units are based on the closing market price of our common stock on the date of grant. Restricted stock vest upon the achievement of Company three-year cumulative performance measures and service conditions or only service conditions whereby they vest ratably over three years. Restricted stock units vest after the completion of a service period of thirteen months. Compensation expense equal to the fair value of each restricted stock award or restricted stock unit is recognized ratably over this requisite service period. For the restricted stock awards including performance vesting conditions, compensation expense is based on management’s projections and the probability of achievement of those targets, which requires considerable judgment. We record a cumulative adjustment to share-based compensation expense in periods that we change our estimate of the number of shares expected to vest. Additionally, we ultimately adjust the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Further, we estimate a forfeiture rate to reflect the potential separation of employees.
Assumptions and Approach Used. In determining the value of stock options, we estimated an expected term based upon historical actuals and company peer actuals and adjusted it by the cost of equity in order to incorporate the impact of the market condition, expected dividend yield based upon our expectation of the dividend that would be paid out on the underlying shares during the expected term of the option. Expected volatility is based on our historical stock prices using a mathematical formula to measure the standard deviation of the change in the natural logarithm of our underlying stock price over a period of time commensurate with the expected term. The risk-free interest rate is derived from the zero coupon rate on U.S. Treasury instruments with a term commensurate with the award’s expected term.
For restricted stock with vesting contingent on the achievement of Company performance conditions, the amount of compensation expense is estimated based on the expected achievement of the performance condition. This requires us to make estimates of the likelihood of the achievement of Company performance conditions, which is highly judgmental. We base our judgments as to the expected achievement of Company performance conditions based on the financial projections of the Company that are used by management for business purposes, which represent our best estimate of expected Company performance. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of stock-based awards, we may be required to accelerate, increase or decrease any remaining, unrecognized stock-based compensation expense. To the extent that we grant additional stock-based awards, compensation expense will increase in relation to the fair value of the additional grants. Compensation expense may be significantly impacted in the future to the extent our estimates differ from actual results. Further, we estimate a forfeiture rate of restricted stock based upon historical forfeitures. If future forfeitures differ significantly from our past experience our compensation expense may be significantly impacted.
Income Taxes
Nature of Estimates Required. We account for income taxes in accordance with ASC 740 – Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the audited Consolidated Financial Statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the
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taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are to be established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company expects that it will generate a three-year cumulative pre-tax book loss during 2021 driven by the impact of the COVID-19 Pandemic on the Company’s operations in 2020, the effect of which is expected to continue into 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. Therefore, as of December 31, 2020 we have a valuation allowance in the amount of $212.0 million against the deferred tax asset. As we do expect to generate pre-tax book income following the resolution of the COVID-19 Pandemic, we have not recorded any impact of the Net Business Interest Expense Limitation IRC § 163(j) on our payable to founding members under the TRA.
In addition, due to the basis differences resulting from our IPO-related transactions (including the TRA with the founding members) and subsequent adjustments pursuant to the common unit adjustment agreement, we are required to make cash payments under the TRA to the founding members in amounts equal to 90% of our actual tax benefit realized from the tax amortization of the basis difference for certain deferred assets noted above. Following the increase in the valuation allowance as of December 31, 2020, the Company recorded a corresponding $151.9 million reduction to the ‘Payable to founding members under the tax receivable agreement’ equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020. Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to founding members under the tax receivable agreement which would increase to reflect future payments to the founding members at that time. The requirements of the TRA, as amended, are highly technical and complex and involve management’s judgment, including judgments to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements. If we were to fail to meet certain of the requirements of the TRA, we could be subject to additional payments to taxing authorities or to the founding members. We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the audited Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
For fiscal 2020, our provision for income taxes was $162.2 million. Changes in management’s estimates and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences and judgments used to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements could impact the provision for income taxes and change the effective tax rate.
Recent Accounting Pronouncements
For a discussion of the recent accounting pronouncements relevant to our business operations, refer to the information provided under Note 1 to the audited Consolidated Financial Statements included elsewhere in this document.
Related-Party Transactions
For a discussion of the related-party transactions, refer to the information provided under Note 9 to the audited Consolidated Financial Statements included elsewhere in this document.
Off-Balance Sheet Arrangements
Our operating lease obligations, which primarily include office leases, are not reflected on our balance sheet. Refer to “—Contractual and Other Obligations” for further detail. We do not believe these arrangements are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.