National CineMedia, Inc. 2021 Q1 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. operates the largest U.S. cinema advertising network through National CineMedia, LLC. The filing covers the three months ended April 1, 2021, compared with the three months ended March 26, 2020. Results were substantially affected by COVID-19 theater closures, capacity restrictions, reduced attendance and delays in major movie releases.
- Approximately 60% of network theaters were open as of April 1, 2021; approximately 77% were open as of May 7, 2021.
- The network contained 20,658 screens as of April 1, 2021, including 16,434 founding-member screens and 4,224 affiliate screens.
- AMC redeemed 1,390,567 NCM LLC membership units for NCM, Inc. common stock on March 23, 2021, reducing AMC’s ownership to 0% as of April 1, 2021.
- Weighted-average remaining terms were approximately 18.5 years for founding-member ESAs and 20.9 years for ESAs and affiliate agreements combined, based on pre-COVID attendance levels.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $5.4 million | $64.7 million | Down 91.7% |
| Operating income/(loss) | $(28.3) million | $4.9 million | Down $33.2 million |
| Net loss attributable to NCM, Inc. | $(19.4) million | $(3.7) million | Loss increased $15.7 million |
| Basic and diluted loss per share | $(0.25) | $(0.05) | Loss increased $0.20 |
| Adjusted OIBDA | $(16.2) million | $14.4 million | Down 212.5% |
| Adjusted OIBDA margin | (300.0%) | 22.3% | Down 322.3 percentage points |
| Theater attendance | 13.8 million | 120.4 million | Down 88.5% |
| Operating cash flow | $(25.0) million | $58.1 million | Down $83.1 million |
| Capital expenditures | $2.0 million | $3.3 million | Down $1.3 million |
Revenue declines affected all categories: national and regional advertising revenue fell 92.6% to $3.7 million, local advertising revenue fell 87.2% to $1.2 million, and founding-member beverage revenue fell 90.9% to $0.5 million. Total advertising revenue per attendee declined 27.2% to $0.391, while attendance declined 88.5%.
Operating expenses declined 43.6% to $33.7 million, primarily because attendance-based theater access fees, advertising affiliate costs and personnel and discretionary expenses were lower. Administrative and other costs increased 4.1% to $10.2 million, largely due to higher performance-based and retention-related stock compensation. Share-based compensation expense included a $1.3 million incremental charge from modifications to equity awards.
Interest expense increased to $14.7 million from $13.6 million. The company recorded a $0.4 million loss on debt modification and a $1.5 million gain from remeasurement of the tax receivable agreement payable. No income tax benefit was recorded in Q1 2021 because the company maintained a full valuation allowance on its deferred tax assets.
Balance sheet, debt and liquidity
| Metric | April 1, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $190.7 million | $180.3 million |
| Cash, cash equivalents and marketable securities | $192.2 million | $181.8 million |
| Total borrowings, gross | $1,109.6 million | $1,060.3 million |
| Long-term debt, net | $1,094.1 million | $1,049.6 million |
| Total liabilities | $1,194.3 million | $1,154.8 million |
| Total equity/(deficit) | $(299.3) million | $(268.6) million |
- Debt consisted of $167.0 million drawn on the revolving facility, $312.6 million of term loans, $230.0 million of 2026 senior unsecured notes and $400.0 million of 2028 senior secured notes.
- On March 8, 2021, NCM LLC issued a $50.0 million second tranche of term loans, generating $43.8 million of net proceeds for general corporate purposes.
- Revolver availability was $5.6 million after $167.0 million of borrowings and $2.4 million of letters of credit.
- Total liquidity, including cash, marketable securities and revolver availability, was $197.8 million. Of the cash and marketable securities, $139.4 million was held by NCM LLC and was not available for NCM, Inc. dividends, taxes or tax receivable agreement payments.
- Approximately 57% of borrowings bore fixed interest rates and 43% bore variable rates. A 100-basis-point change in applicable market rates would affect annual cash interest expense by approximately $4.8 million.
Financing activities generated $37.4 million of cash, including the $50.0 million term-loan issuance. The company paid $4.8 million of dividends during the quarter and declared a subsequent $0.05-per-share dividend, approximately $4.0 million, payable June 7, 2021.
Material changes versus the prior comparable period
- Revenue, attendance and operating cash flow deteriorated sharply because theaters were largely closed or operating at limited capacity during the COVID-19 disruption.
- Adjusted OIBDA shifted from positive $14.4 million to negative $16.2 million, and the Adjusted OIBDA margin declined from 22.3% to negative 300.0%.
- Debt increased by $49.3 million gross, primarily from the new $50.0 million term-loan tranche.
- Dividend payments declined because the quarterly dividend was reduced from $0.19 per share in Q1 2020 to $0.05 per share in Q1 2021.
- NCM LLC’s mandatory available-cash distribution for Q1 2021 was calculated as negative $30.9 million, including negative $14.9 million attributable to NCM, Inc.; no distribution was paid. These negative amounts are expected to offset future positive distributions.
- The company continued extensive cost controls, including furloughs or salary reductions affecting more than 75% of employees, a headcount reduction of almost 30% from pre-pandemic levels, suspended discretionary spending and deferred capital expenditures.
Guidance, outlook, risks and unusual items
Management did not provide a clear numerical revenue or earnings forecast. Management expects quarterly results in 2021 to differ from historical seasonal trends because of COVID-19 and stated that the duration and full financial impact of the pandemic remain uncertain.
- Recovery depends on theater reopenings, movie release schedules, attendance, capacity restrictions and consumer willingness to return to theaters. Renewed closures, delayed releases, alternative movie distribution and changes in theatrical release windows could further impair results.
- The Credit Agreement Second Amendment waived specified leverage covenant noncompliance through the quarter ending June 30, 2022. Distribution restrictions generally remain in place until after delivery of a compliance certificate for the quarter ending on or about September 29, 2022, subject to specified leverage, revolver-balance and default conditions.
- Management stated that it expects to meet obligations, including interest and debt service, for the twelve months following issuance of the financial statements based on current liquidity and forecast cash flows.
- The company had potential future payments of up to $113.3 million under network affiliate minimum revenue guarantees, although no liability was accrued as of April 1, 2021.
- The company had a $4.5 million make-good provision for undelivered advertising impressions, down from $7.1 million at December 31, 2020.
- Long-lived asset impairment analyses remain sensitive to attendance, theater operations, movie releases, the financial condition of founding members and affiliates, and other pandemic-related assumptions. No impairment charge was recorded in 2020 or Q1 2021.
- The company’s substantial leverage, limited revolver availability, negative equity and dependence on future theater recovery create significant liquidity and covenant risks.
Important facts for investors to verify
- Whether theater reopenings and attendance continued to improve after April 1, 2021 and whether major film releases translated into sustainable advertising revenue.
- Compliance with the amended credit agreement, including covenant waivers, distribution restrictions, required liquidity and the limited $5.6 million revolver availability.
- The timing and amount of future NCM LLC distributions to NCM, Inc., particularly given accumulated negative available cash.
- The company’s ability to service approximately $1.11 billion of gross debt while operating cash flow remains negative.
- Whether the $0.05 quarterly dividend remains sustainable and permitted under the credit agreement.
- Potential future impairment charges, affiliate minimum-guarantee payments, tax receivable agreement obligations and additional pandemic-related costs.