National CineMedia, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is the holding company for National CineMedia, LLC, which operates a U.S. cinema advertising network through long-term exhibitor service agreements with AMC, Cinemark, Regal and other network affiliates. The filing covers the quarter and six months ended June 30, 2022, compared with the periods ended July 1, 2021. All network theaters were open during the first half of 2022, and major movie releases had resumed, but advertising revenue remained below historical levels because advertiser recovery lagged attendance recovery.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $67.1 million | $14.0 million | $103.0 million | $19.4 million |
| Operating income (loss) | $5.6 million | $(29.6) million | $(16.9) million | $(57.9) million |
| Net loss attributable to NCM, Inc. | $(0.7) million | $(22.7) million | $(25.9) million | $(42.1) million |
| Net loss per diluted share | $(0.01) | $(0.28) | $(0.32) | $(0.53) |
| Adjusted OIBDA | $15.1 million | $(18.7) million | $8.2 million | $(34.9) million |
| Adjusted OIBDA margin | 22.5% | (133.6)% | 8.0% | (179.9)% |
| Theater attendance | 124.2 million | 49.1 million | 200.2 million | 62.9 million |
| Cash flow from operations | Not separately provided | Not separately provided | $(40.4) million | $(61.6) million |
Q2 revenue increased 379.3%, driven by national advertising revenue of $50.7 million, local and regional advertising revenue of $10.5 million, and founding-member beverage revenue of $5.9 million. National advertising CPM increased 48.1% year over year in the quarter. Six-month revenue increased 430.9%, with national advertising CPM up 41.4%.
At June 30, 2022, cash and cash equivalents were $73.1 million, marketable securities totaled $1.3 million, and total liquidity was $81.2 million, including $6.8 million of revolving-credit availability. Cash declined from $101.2 million at December 30, 2021. Total borrowings were $1.13 billion, or $1.12 billion net of debt issuance costs and discounts. Total liabilities exceeded assets, producing a total equity deficit of $431.3 million.
Material changes versus the prior comparable period
- Revenue and attendance rebounded sharply as theaters reopened and the movie slate improved.
- Operating expenses increased 41.1% in Q2 and 55.1% year to date, primarily from higher advertising affiliate expense, theater access fees, revenue sharing and restored personnel costs.
- Operating results improved to Q2 operating income of $5.6 million and Adjusted OIBDA of $15.1 million, versus losses in the prior-year quarter.
- Interest expense increased to $20.4 million in Q2 and $37.6 million year to date, primarily following the January 2022 incremental revolving facility.
- The company recognized a $5.9 million net gain on modification and retirement of debt in the first half, including a $6.0 million second-quarter gain from purchasing $25.8 million principal amount of the 2028 notes.
- A $5.8 million impairment charge was recorded in the first quarter for internally developed software no longer in use.
- Dividend declarations declined to $0.08 per share for the first half of 2022 from $0.10 per share in the prior-year period. No NCM LLC available-cash distribution was payable for Q2 2022.
Outlook, risks and unusual items
Management stated that attendance was approaching historical levels, but advertising revenue continued to lag attendance. COVID-19 variants, post-production delays, movie-release timing, advertiser demand and broader economic conditions could adversely affect attendance, pricing, revenue and cash flow. The company also faces seasonal operating results and significant dependence on founding-member relationships and long-term theater agreements.
The filing identifies substantial doubt about the company’s ability to continue as a going concern. NCM LLC had $217.0 million outstanding under two revolving facilities maturing June 20, 2023 and did not have sufficient liquidity to repay them at maturity. Failure to refinance or extend those facilities could trigger defaults and acceleration of term loans and senior notes. Management plans to seek maturity extensions, further covenant waivers or additional financing, but the filing states these plans were not probable and did not alleviate the going-concern uncertainty.
Financial covenants were suspended through the quarter ending December 29, 2022, subject to the January 2022 credit agreement amendment. The company stated it was in compliance with applicable requirements as of June 30, 2022, but did not expect to meet its financial covenants within one year after issuance of the financial statements. Approximately 47% of borrowings carried variable interest rates; a 100-basis-point change in applicable rates would affect annual cash interest expense by approximately $5.3 million.
The company maintained a full valuation allowance on deferred tax assets and recorded no income tax expense, resulting in a 0.0% effective tax rate. A $0.03 per-share dividend, approximately $2.4 million, was declared on August 8, 2022 for payment on September 6, 2022.
Important facts for investors to verify
- Progress toward refinancing or extending the $217.0 million of revolving debt maturing in June 2023.
- Compliance with, or further waivers of, leverage and other debt covenants as the waiver period expires.
- Whether advertising revenue and CPMs continue to recover in line with theater attendance.
- Cash burn, collections, available liquidity and the ability to fund operations, interest, dividends and tax receivable agreement obligations.
- The potential effect of higher variable interest rates on cash interest expense.
- Future impairment risk for the company’s substantial theater-access intangible assets if projected cash flows deteriorate.
- The sustainability and discretion of future dividends given restricted NCM LLC distributions and the disclosed going-concern uncertainty.