National CineMedia, Inc. Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. operates the largest U.S. cinema advertising network through National CineMedia, LLC. Revenue is generated primarily from national, regional and local advertising, founding-member beverage advertising, lobby advertising and digital properties. This report covers the 13 weeks ended March 26, 2020, compared with the 13 weeks ended March 28, 2019. The quarter was materially disrupted by COVID-19; almost all network theaters were temporarily closed by March 26, 2020, eliminating substantially all in-theater advertising revenue while closures continued.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $64.7 million | $76.9 million | -15.9% |
| Operating income | $4.9 million | $10.9 million | -55.0% |
| Operating margin | 7.6% | 14.2% | Down 6.6 percentage points |
| Adjusted OIBDA | $14.4 million | $22.1 million | -34.8% |
| Adjusted OIBDA margin | 22.3% | 28.8% | Down 6.5 percentage points |
| Net loss attributable to NCM, Inc. | $3.7 million | $1.1 million | Loss increased |
| Diluted loss per share | $0.05 | $0.01 | Loss increased |
| Operating cash flow | $58.1 million | $46.0 million | +$12.1 million |
Revenue declines reflected a 19.0% decrease in theater attendance to 120.4 million. National and regional advertising revenue declined 13.2% to $49.8 million, local advertising declined 26.6% to $9.4 million, and founding-member beverage revenue declined 17.9% to $5.5 million. Total advertising revenue per attendee increased 3.9% to $0.537, but this was more than offset by lower attendance.
Operating expenses decreased 9.4% to $59.8 million, less than the revenue decline. Interest on borrowings was $13.6 million, and consolidated net loss was $8.2 million, including a $4.5 million loss attributable to noncontrolling interests. The effective tax rate was 8.8%, producing a $0.4 million tax benefit.
Cash and cash equivalents were $193.2 million at March 26, 2020, compared with $55.9 million at December 26, 2019. Including marketable securities, total cash and securities were $215.3 million. Cash increased primarily because the Company drew $110.0 million on its revolving credit facility and collected receivables. Financing cash flow was $78.4 million, including $127.? million of net revolver proceeds, dividends of $15.5 million and distributions to founding members of $32.4 million. The filing text indicates gross revolver borrowings of $210.0 million and repayments of $82.0 million.
Total borrowings were $1.063 billion at March 26, 2020, consisting of $167.0 million under the revolver, $266.0 million of term loans, $230.0 million of 2026 notes and $400.0 million of 2028 notes. Net debt issuance costs reduced reported debt to $1.054 billion. Approximately 59% of borrowings carried fixed rates and 41% carried variable rates. A 100-basis-point change in applicable variable rates would affect annual cash interest expense by approximately $4.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $12.2 million, primarily from lower attendance, theater closures, weaker March demand and lower national advertising CPMs.
- Adjusted OIBDA decreased $7.7 million, and margin contracted from 28.8% to 22.3%.
- Operating income fell $6.0 million; net loss attributable to NCM, Inc. increased from $1.1 million to $3.7 million.
- The Company adopted the current expected credit loss standard, recording a $3.2 million cumulative-effect reduction to retained earnings and increasing its allowance for local and regional receivables in response to COVID-19-related collection risks.
- Debt increased materially as the Company drew $110.0 million on its revolver during March to fund operations during expected theater closures. Revolver availability fell to $4.4 million, net of $3.6 million of letters of credit.
- The Company issued 3.0 million NCM LLC units to founding members for theater access rights and recorded a $10.5 million intangible asset.
- Quarterly cash dividends declared increased to $0.19 per share during the quarter, but the Company subsequently reduced the dividend to $0.07 per share.
Outlook, Risks, Contingencies and Unusual Items
Management provided no formal revenue or earnings guidance. Management stated that, based on cash on hand, receivable collections and expected future operating cash flow after theaters reopen, liquidity should be sufficient for working capital, debt service and capital expenditures for the next twelve months. As of May 4, 2020, approximately $66.7 million of the $113.7 million of trade receivables outstanding at March 26 had been collected.
COVID-19 remains the dominant risk. The Company cannot generate in-theater revenue while theaters are closed, and future results depend on reopening timing, attendance recovery, advertising demand, movie releases, consumer behavior, government restrictions and the potential shortening of theatrical release windows. Management implemented furloughs affecting approximately 30% of staff, pay reductions of up to 50% for remaining employees, a hiring freeze, reduced discretionary spending, deferred capital expenditures and other cash-preservation actions.
On April 30, 2020, NCM LLC amended its credit agreement to provide an automatic waiver of specified leverage covenant noncompliance from the quarter ending June 25, 2020 through the quarter ending July 1, 2021. During this covenant holiday, NCM LLC must maintain at least $55.0 million of combined unrestricted cash and revolver availability. Member distributions are restricted unless trailing 12-month Consolidated EBITDA is at least $277.0 million and revolver borrowings are no more than $39.0 million. These restrictions could defer distributions to NCM, Inc. and its stockholders.
At March 26, 2020, NCM LLC remained in compliance with its leverage covenants, with a net senior secured leverage ratio of 3.28 times versus a 4.50-times covenant and a net total leverage ratio of 4.31 times versus a 6.25-times covenant. No impairment charge was recorded for theater-related intangible assets, although management identified COVID-19-related impairment indicators and noted that future impairment charges remain possible.
The Company declared a $0.07-per-share dividend on May 5, 2020, totaling approximately $5.4 million, payable June 1, 2020. The filing also discusses potential benefits from the CARES Act, including payroll-tax deferrals and employee-retention credits, but the financial statements do not incorporate those benefits.
Important Facts for Investors to Verify
- Timing and pace of theater reopenings, attendance recovery and restoration of advertising revenue.
- Receivable collections and potential additional bad-debt expense, particularly among local and regional advertisers.
- Compliance with the amended credit agreement’s $55.0 million minimum liquidity requirement and distribution restrictions.
- Revolver utilization, refinancing needs and sensitivity to variable interest rates.
- Whether the reduced $0.07 dividend can be maintained while NCM LLC distributions remain restricted.
- Potential impairment of theater-related intangible assets if post-pandemic cash-flow projections deteriorate.
- Financial condition of founding members and network affiliates, including risks of bankruptcy, contract rejection or theater removals.
- Impact of delayed film releases, shortened theatrical windows and lasting changes in consumer or advertiser behavior.